The British Yearbook of International Law VC The Author(s) 2020. Published by Oxford University Press. Available online at www.bybil.oxfordjournals.org This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted reuse, distribu-
tion, and reproduction in any medium, provided the original work is properly cited. Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 doi:10.1093/bybil/braa007 ...... SECONDARY SANCTIONS:AWEAPON OUT OF CONTROL?THE INTERNATIONAL LEGALITY OF, AND EUROPEAN RESPONSES TO,US SECONDARY SANCTIONS
By TOM RUYS* AND CEDRIC RYNGAERT**
ABSTRACT The US is increasingly weaponizing economic sanctions to push through its foreign policy agenda. Making use of the centrality of the US in the global economy, it has imposed ‘secondary sanctions’ on foreign firms, which are forced to choose between trading with US sanctions targets or forfeiting ac- cess to the lucrative US market. In addition, the US has penalized foreign firms for breaching US sanctions legislation. In this contribution, it is argued that the international lawfulness of at least some secondary sanctions is doubtful in light of the customary international law of jurisdiction, as well as conventional international law (eg, WTO law). The lawfulness of these sanc- tions could be contested before various domestic and international judicial mechanisms, although each mechanism comes with its own limitations. To counter the adverse effects of secondary sanctions, third states and the EU can also make use of, and have already made use of, various non-judicial mechanisms, such as blocking statutes, special purpose vehicles to circumvent the reach of sanctions, or even countermeasures. The effectiveness of such mechanisms is, however, uncertain. Keywords: secondary sanctions, extraterritoriality, jurisdiction, international economic law, United States, European Union.
* Professor of Public International Law, Ghent University, Ghent Rolin-Jaequemyns International Law Institute, [email protected]. ** Professor of Public International Law, Utrecht University, RENFORCE research programme, [email protected]. The authors would like to extend their gratitude to the European Central Bank (ECB), which has been so kind as to fund the research that informs this article through its Legal Research Programme (2019). Earlier drafts of this paper were presented during an expert seminar at Utrecht University, as well as during a meeting with the ECB Legal Service. The authors wish to thank the participants at both events, and the two anonymous reviewers, for their feedback. The paper was finalized in December 2019, with a minor update undertaken in May 2020.
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I. INTRODUCTION II. SECONDARY SANCTIONS:DEFINING THE CONCEPT III. THE LEGALITY OF SECONDARY SANCTIONS AND THE CUSTOMARY INTERNATIONAL LAW OF JURISDICTION (A) Secondary sanctions as access restrictions (B) Secondary sanctions going beyond access restrictions 1. US corporate control and the nationality principle 2. Prohibiting re-exportation of US items under the nationality principle 3. ‘Territorial’ use of the US financial system 4. A private cause of action for trafficking in US property: Reliance on passive personality? 5. Justifying secondary sanctions under the protective principle 6. Anti-evasion as a jurisdictional ground (C) Concluding observations IV. INTERNATIONAL LEGALITY OF SECONDARY SANCTIONS UNDER CONVENTIONAL LAW (A) International monetary law: Secondary sanctions as restrictions on payments (B) Secondary sanctions and WTO law 1. National treatment and most-favoured nation treatment 2. The prohibition of quantitative restrictions 3. Other potential breaches of WTO law (C) Potential breaches of bilateral instruments (D) Provisional conclusion (E) The security exception as an impenetrable line of defence for sanctioning states? 1. Security exceptions in bilateral investment treaties and friend- ship, commerce, and navigation treaties 2. Security exceptions in the WTO Agreements 3. Implications in the secondary sanctions context V. JUDICIAL CHALLENGES TO THE WIDE REACH OF US SECONDARY SANCTIONS (A) Judicial challenges before US courts (B) Judicial challenges at the international level 1. International dispute settlement on the basis of the WTO Agreements, friendship, commerce, and navigation treaties, or bilateral investment treaties 2. Circumventing the security exception: What alternatives? a. The advisory jurisdiction of the International Court of Justice b. Contentious litigation on the basis of the post-WWII Economic Cooperation Agreements VI. CHALLENGING US SECONDARY SANCTIONS THROUGH NON-JUDICIAL MEANS:THE EU BLOCKING STATUTE (A) The compliance prohibition 1. Compliance authorization 2. Direct enforcement under public law 3. Incidental enforcement by courts hearing contractual disputes 4. Deterrence SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 3 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020
(B) Clawback (C) Directly challenging US secondary sanctions before European courts: The hurdle of state immunity (D) Concluding observations VII. CHALLENGING US SECONDARY SANCTIONS THROUGH NON-JUDICIAL MEANS:OTHER OPTIONS (A) Boosting the position of the euro (B) Facilitating international transactions by means of a special purpose vehicle (C) A European Office of Foreign Assets Control (D) Retaliatory measures VIII. CONCLUDING OBSERVATIONS
I. INTRODUCTION
Lately, the US has increasingly been ‘weaponizing’ economic sanctions to push through a foreign policy agenda.1 Making use of the centrality of the US in the global economy, it has forced foreign states and their firms to choose between halting trade with US sanctions targets or forfeiting access to the lucrative US market. In addition, the US has not shied away from slapping huge fines on foreign firms present in the US that route payments to sanctions targets through the US financial system.2 While US reliance on economic sanctions as a foreign policy tool is hardly novel,3 the US has recently made much more aggressive use of them to project US power abroad.4 Most eye-catching have been the re- instatement of US sanctions against Iran in 20185 and the strengthening of the Cuba boycott,6 however US sanctions are set to grow even more. Just as this article was finalized, for instance, President Trump signed into law an act imposing sanctions on persons involved in the construc- tion of the Nord Stream 2 gas pipeline, which will transport natural gas from Russia to the EU.7
1 See also E Geranmayeh and M Lafont Rapnouil, ‘Meeting the Challenge of Secondary Sanctions’ in M Leonard and J Shapiro (eds), Strategic Sovereignty: How Europe Can Regain the Capacity to Act (European Council on Foreign Relations 2019). Such sanctions go beyond multilat- erally agreed sanctions that are normally promulgated by the UN Security Council. 2 See Part II.B.3. 3 See, notably, Cuban Liberty and Democratic Solidarity (Libertad) Act 1996, 22 USC §§ 6021–91 (Helms-Burton Act) and Iran and Libya Sanctions Act 1996, 50 USC §§ 1701ff. 4 ‘Weapons of Mass Disruption: America is Deploying a New Economic Arsenal to Assert its Power’ The Economist (6 June 2019). 5 See, notably, ‘Reimposing Certain Sanctions with Respect to Iran’, Exec Order No 13,846, 83 Fed Reg 38,939 (7 August 2018). 6 Notably the reactivation of Title III of the Helms-Burton Act by President Trump in 2019: J Gabilondo, ‘No Oligarch Left Behind: Trump’s Title III Cuba Policy’ (Just Security, 3 June 2019)
Sanctions’ (Atlantic Council, 31 May 2019)
10 See, eg, C Van Haute, S Nordin, and G Forwood, ‘The Reincarnation of the EU Blocking Regulation: Putting European Companies Between a Rock and a Hard Place’ (2018) 13 Global Trade and Customs Journal 496; RP Alford, ‘The Self-Judging WTO Security Exception’ (2011) Utah Law Review 697. See also the references in note 295. 11 European Commission, ‘EU Position in World Trade’
II. SECONDARY SANCTIONS:DEFINING THE CONCEPT
Economic sanctions are essentially a political tool.16 They are used to force sanctions targets to fall in line with the targeting state’s political
15 Note that this contribution does not address the compatibility of secondary sanctions with international human rights treaties or other instruments protecting human rights, without, however, denying the validity of this perspective. Especially in Europe, there is a rich body of case law on the compatibility of targeted sanctions, notably asset freezes and travel restrictions imposed on natural and legal persons suspected of supporting terrorism, with human rights protections: see, eg, Joined Cases C-402/05P and C-415/05P Yassin Abdullah Kadi and Al Barakaat International Foundation v Council of the European Union and Commission of the European Communities [2008] ECR I-06351; Case of Al-Dulimi and Montana Management Inc v Switzerland App no 5809/08 (ECtHR, 21 June 2016). The human rights impact of secondary sanctions has also been addressed, for instance, by the successive UN special rapporteurs on unilateral coercive measures: see, eg, UNHRC, ‘Report of the Special Rapporteur on the Negative Impact of Unilateral Coercive Measures on the Enjoyment of Human Rights’ (30 August 2018) UN Doc A/HRC/39/54, paras 7, 11, 25, 35–37; ‘UN rights expert urges Governments to save lives by lifting all economic sanctions amid COVID-19 pandemic’ (3 April 2020)
17 On the US Treasury’s counterterrorism sanctions, see US Department of the Treasury, ‘Counter Terrorism Sanctions’
23 See Part III.B. 24 Compare also with the UK Financial Markets Law Committee (FMLC), ‘U.S. Sanctions and the E.U. Blocking Regulation: Issues of Legal Uncertainty’ (June 2019) section 2.3, note 4 (doubting whether a settlement between OFAC and Singapore-based companies that was jurisdic- tionally based on US dollars being processed through the US financial system qualified as a primary sanction). 25 cf Bechky, ‘Sanctions and the Blurred Boundaries of International Economic Law’, 9 (‘the concept of “extraterritorial sanctions” should be compared with its cousin, “secondary sanctions.” Extraterritorial sanctions govern conduct by persons located outside the sending state’), but stating at 11 that ‘[s]econdary sanctions are extraterritorial, though extraterritorial sanctions need not be secondary’, there citing the practice of extraterritorial ‘primary’ sanctions, which we consider sec- ondary in nature. 26 Rathbone, Jeydel, and Lentz , ‘Sanctions, Sanctions Everywhere’, 1084. 27 EV McLean and T Whang, ‘Friends or Foes? Major Trading Partners and the Success of Economic Sanctions’ (2010) 54 International Studies Quarterly 427. In the case of Iran, the process of backfilling led to the adoption of the Iran Sanctions Act in 1996, which provides for secondary sanctions: Iran Sanctions Act of 1996 (as amended by Iran Sanctions Extension Act, Pub L No 114– 277 (2016)). 28 B Han, ‘The Role and Welfare Rationale of Secondary Sanctions: A Theory and a Case Study of the US Sanctions Targeting Iran’ (2018) 35 Conflict Management and Peace Science 474. SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 9 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 consider that the target state poses a threat), they will consider such sanctions to be welfare-decreasing, and to impinge on their sovereign right to authorize, or even encourage, trade with the target. In legal terms, such states may consider secondary sanctions to violate the prin- ciple of non-intervention, and to be extraterritorial in nature, in viola- tion of constraints imposed by the international law of jurisdiction, in addition to other potential breaches. Not all secondary sanctions are necessarily internationally unlawful, however, even if they may severely restrict foreign states’ political sover- eignty to conduct their international economic relations as they see fit.29 There is no doubt that US secondary sanctions have a major impact on foreign states and non-US persons, as they seriously complicate—or sometimes render nearly impossible—economic and financial transac- tions between foreign states and persons on the one hand and the foreign sanctions targets on the other. However, adverse economic impacts do not equal international illegality. It is entirely possible that some second- ary sanctions adversely affect the economic and financial interests of for- eign states and persons without being internationally unlawful.30
III. THE LEGALITY OF SECONDARY SANCTIONS AND THE CUSTOMARY INTERNATIONAL LAW OF JURISDICTION
This part ascertains what types of secondary sanctions engage, and pos- sibly violate, the customary international law of jurisdiction, and which do not. It is argued that sanctions which limit foreign persons’ access to the targeting state’s economic or financial system fall within that state’s territorial sovereignty, and in principle do not raise concerns under the law of jurisdiction. However, sanctions which are more far-reaching, such as fines, are more problematic. As will be explained in this part, a
29 On the importance of safeguarding EU sovereignty in the face of US extraterritorial sanc- tions, without necessarily considering such sanctions to be incompatible with international law, see, eg, P Bonnecarre`re, ‘Rapport d’information fait au nom de la commission des affaires europe´ennes (1) sur l‘extraterritorialite´ des sanctions ame´ricaines’ (Se´nat 4 October 2018) 7. 30 Interestingly, the British Protection of Trading Interests Act 1980, which was adopted to counter US ‘extraterritorial’ sanctions, primarily in the antitrust field, limited itself to stating that ‘those measures, in so far as they apply or would apply to things done or to be done outside the terri- torial jurisdiction of that country by persons carrying on business in the United Kingdom, are dam- aging or threaten to damage the trading interests of the United Kingdom’ without considering such measures ipso facto internationally unlawful (Protection of Trading Interests Act 1980, s 1(1)(b) (emphasis added)). In contrast, art 1 of Council Regulation (EC) 2271/96 of 22 November 1996 pro- tecting against the effects of the extra-territorial application of legislation adopted by a third coun- try, and actions based thereon or resulting therefrom [1996] OJ L309/1 (the 1996 EU Blocking Statute), which ‘provides protection against and counteracts the effects of the extraterritorial appli- cation’ of foreign law, is premised on the incompatibility of such application with international law (ibid, preamble). Bismuth, however, has implied that the Blocking Statute was enacted to protect EU economic interests rather than to protect the international legal order: see R Bismuth, ‘Pour une appre´hension nuance´ de l’extraterritorialite´ du droit ame´ricain – Quelques re´flexions autour des pro- ce´dures et sanctions visant Alstom et BNP Paribas’ (2015) 61 Annuaire Franc¸ais de Droit International Law 785, 803. 10 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 substantial connection (nexus) between the sanctioned activity and the targeting state may often be lacking. The analysis in this part is based on the concept of (state) jurisdiction under customary international law. The extent to which secondary sanc- tions engage, and possibly violate, more specific obligations under inter- national law, in particular as laid down in WTO Agreements and bilateral trade and investment agreements, are addressed in Part IV. Secondary sanctions may also violate some general principles of inter- national law, in particular the principle of non-intervention31 and the principle (or prohibition) of abuse of rights (abus de droit).32 These prin- ciples are vague, however, and it is unclear exactly how they might be applied in respect of secondary sanctions. For instance, precisely when an intervention unlawfully impinges on a foreign state’s sovereignty is notoriously difficult to define.33 Moreover, the principles of jurisdiction already constitute a specific manifestation of the principle of non- intervention. Insofar as secondary sanctions may potentially constitute an abuse of rights,34 in particular in cases of arbitrary or disproportion- ate application of sanctions legislation,35 it remains in the eye of the be- holder what is arbitrary or disproportionate in a given case—an issue which has long dogged the related principle of jurisdictional reasonableness.36
31 See AALCO, ‘Extraterritorial Application of National Legislation: Sanctions Imposed against Third Parties’ (considering primary and secondary sanctions to violate the principle of non- intervention). But see Tzanakopoulos, ‘The Right to Be Free from Economic Coercion’, 633 (ques- tioning whether there is a right of states to be free from economic coercion). 32 A Kiss, ‘Abuse of Rights’, MPEPIL Online (last updated December 2006) para 6. 33 The ICJ has ruled that an intervention is unlawful if it is ‘bearing on matters in which each State is permitted, by the principle of State sovereignty, to decide freely’: Case Concerning Military and Paramilitary Activities in and Against Nicaragua (Nicaragua v United States of America) (Merits) [1986] ICJ Rep 14, para 205. This definition may just beg the question. For instance, does a denial of access to US markets for non-US companies violate these companies’ home states’ right to decide freely on sovereign matters? 34 Kiss, ‘Abuse of Rights’, para 6. 35 It is possible that the vagueness of some terms in US sanctions legislation (such as ‘persons’ and ‘significant transactions’, as discussed below) may lead to arbitrary application of sanctions, and thus abuse of rights. Also, certain enforcement measures, eg extremely large settlements, may be disproportionate to the aim pursued, and thus constitute an abuse of rights. Foreign states have com- plained about the disproportionality of settlement amounts. See, notably, French President Hollande protesting, on grounds of proportionality, an 8.9 billion US dollar fine imposed on French bank BNP Paribas for violations of US sanctions legislation: J Treanor, ‘BNP Paribas Expects “Heavy Penalty” for Sanctions Violations’ The Guardian (30 June 2014)
A. Secondary sanctions as access restrictions A considerable number of US secondary sanctions are access restrictions. Take, for instance, the best-known country-specific sanctions pro- gramme of the US: the Iran sanctions. Under the Iran Sanctions Act, the US Secretary of State or Secretary of the Treasury can impose on non-US persons ‘menu-based’ sanctions. More specifically, they are required to impose at least five out of the following twelve available sanctions: 1. denial of Export-Import Bank loans, credits, or credit guarantees for U.S. exports to the sanctioned entity 2. denial of licenses for the U.S. export of military or militarily useful technology to the entity 3. denial of U.S. bank loans exceeding $10 million in one year to the entity 4. if the entity is a financial institution, a prohibition on its service as a primary dealer in U.S. government bonds; and/or a prohibition on its serving as a repository for U.S. government funds 5. prohibition on U.S. government procurement from the entity 6. prohibitions in transactions in foreign exchange by the entity 7. prohibition on any credit or payments between the entity and any U.S. financial institution 8. prohibition of the sanctioned entity from acquiring, holding, using, or trading any U.S.-based property which the sanctioned entity has a (fi- nancial) interest in 9. restriction on imports from the sanctioned entity, in accordance with the International Emergency Economic Powers Act 10. a ban on a U.S. person from investing in or purchasing significant amounts of equity or debt instruments of a sanctioned person 11. exclusion from the United States of corporate officers or controlling shareholders of a sanctioned firm 12. imposition of any of the ISA sanctions on principal offices of a sanc- tioned firm37
37 US Congressional Research Service, ‘Iran Sanctions’, 17. This overview consolidates the sanctions imposed under the Iran Sanctions Act, originally the Iran and Libya Sanctions Act, Pub 12 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 These sanctions are an attractive enforcement tool as, unlike the puni- tive measures discussed in Section B, they can almost immediately be applied.38 Jurisdictionally speaking, access restrictions create obligations for US persons,39 and regulate activities that occur in the US and in- volve US persons as counterparties. They could be justified under a combined application of the territoriality and nationality principles, even if their ultimate addressees are non-US persons.40 Thus, Jeffrey Meyer argues, ‘[w]hen secondary sanctions are terrinationally restricted to the regulation of U.S. nationals with respect to their non- governmental acts within the United States, then these sanctions should be viewed as presumptively permissible as a matter of customary juris- dictional law’.41 More fundamentally, from the perspective of non-US persons, most of these measures—denial of access to the US financial system, access to US markets, or access to the US for individual per- sons—merely amount to the denial of privileges.42 As international law does not entitle foreign persons to financial, economic, or physical access to the US, such measures do not, in principle, raise jurisdictional problems. Measures regulating access to a state’s territory, including access to economic facilities based in the territory, are grounded on the principle that states, in the exercise of their territorial sovereignty, have consider- able discretionary power to control their borders.43 Recently, states have
L No 104-172 (1996), the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, Pub L No 111-195 (2010), and the Iran Threat Reduction and Syria Human Rights Act, Pub L No 112-158 (2012). 38 S Sultoon and J Walker, ‘Secondary Sanctions’ Implications and the Transatlantic Relationship’ (Atlantic Council Issue Brief, September 2019) 3. 39 O Moehr, ‘Secondary Sanctions: A First Glance’ (Atlantic Council, 6 February 2018): ‘US secondary sanctions legally target US persons and not directly third parties’. 40 Rathbone, Jeydel, and Lentz, ‘Sanctions, Sanctions Everywhere’, 1071, conceding, however, that ‘many U.S. trading partners did not view that distinction as material, and retaliated against the United States for what they considered to be unjustified extraterritorial measures that infringed on their sovereign economic rights’. 41 Meyer, ‘Second Thoughts on Secondary Sanctions’, 967. 42 Rathbone, Jeydel, and Lentz , ‘Sanctions, Sanctions Everywhere’, 1071. For a recent example of a denial of entry to the US (a travel ban), see ‘Statement by Melia Hotels International’ (5 February 2020)
52 Substantive EU law is very much based on the ‘four freedoms’, the free movement of goods, persons, services, and capital across intra-EU borders: see C Barnard, Substantive EU Law (5th edn, OUP 2016). 53 Bismuth, ‘Pour une appre´hension nuance´ de l’extraterritorialite´ du droit ame´ricain’, 789. 54 For rankings, see International Chamber of Commerce, ‘Open Markets Index 2017’
56 MA Weiss, ‘Arab League Boycott of Israel’ (US Congressional Research Service, Report RL33961, 25 August 2017). 57 For US anti-boycott export regulations, see 15 CFR § 760.1ff. 58 cf s 7035 of the Consolidated and Further Continuing Appropriations Act, Pub L No 115-31 (2017), limiting itself to stating that the secondary boycott is ‘an impediment to peace in the region and to U.S. investment and trade’. 59 See, eg, Abu Dhabi Ports, ‘Chief Harbour Master Direction: Restriction to Vessels and Cargo Coming from / Going to Qatari Ports’ (CHM Direction No 02/17, 5 June 2017). 60 A Honniball, ‘Port State Jurisdiction Beyond Oceans Governance: The Closure of Ports to Qatar in the 2017 “Gulf Crisis”’ (EJIL:Talk!, 3 July 2017)
B. Secondary sanctions going beyond access restrictions The consequences of violating secondary sanctions legislation are not limited to the mere denial of privileges of territorial access. This is espe- cially the case for US secondary sanctions. Depending on the sanctions programme, US authorities can impose draconian civil and criminal penalties on non-US firms, including non-US controlled firms, for vio- lating US sanctions legislation.71 The threat of penalties has forced such
64 A financial system is a ‘system that aims at establishing and providing a regular, smooth, effi- cient and cost effective linkage between depositors and investors’, and consists of financial institu- tions, services, markets and instruments: see S Gurusamy, Financial Services and Systems (2nd edn, McGraw-Hill 2009) 3. Economic sanctions mainly have an impact on the operation of financial pay- ment systems, especially wire-transfers. For an explanation of value transfer and key payment sys- tems of the US financial system specifically in the context of US economic sanctions, see BE Carter and R Farha, ‘Overview and Operation of U.S. Financial Sanctions, Including the Example of Iran’ (2013) 44 Georgetown Journal of International Law 903, 905–907. 65 Rathbone, Jeydel, and Lentz, ‘Sanctions, Sanctions Everywhere’, 1112. 66 ibid 1118. 67 ibid 1119. 68 Emphasis added. See, eg, ‘Reimposing Certain Sanctions with Respect to Iran’, Exec Order No 13,846, s 2: ‘Correspondent and Payable-Through Account Sanctions Relating to Iran’s Automotive Sector; Certain Iranian Persons; and Trade in Iranian Petroleum, Petroleum Products, and Petrochemical Products’. 69 See Interview with a representative of a Ministry of Finance of an EU Member State (24 April 2019). See also C Lepage, Directrice de l’international au Mouvement des entreprises de France (MEDEF) in Bonnecarre`re, ‘Extraterritorialite´ des sanctions ame´ricaines’, 54. 70 Interview with compliance officer of major European bank (16 April 2019). It is not fully clear whether overcompliance is in violation of the EU Blocking Statute: see Interview with Commission official (16 May 2019). 71 For current OFAC penalty amounts, see section V.B.2.a of appendix A to OFAC’s Economic Sanctions Enforcement Guidelines at 31 CFR part 501. For criminal penalties, see International Emergency Economic Powers Act (IEEPA), 50 USC §1705(c): ‘A person who willfully commits, willfully attempts to commit, or willfully conspires to commit, or aids or abets in the commission of, an unlawful act described in subsection (a) shall, upon conviction, be fined not more than $1,000,000, or if a natural person, may be imprisoned for not more than 20 years, or both.’ SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 17 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 firms to accept large settlements. In 2014, in what was the largest ever settlement regarding secondary sanctions violations, French bank BNP Paribas settled its potential liability for apparent violations of US sanc- tions regulations with US federal and state government agencies for a combined US$8.9 billion.72 These penalties do not deny to the sanctioned persons privileges pre- viously granted by the US. They are more onerous and intrusive en- forcement measures that go beyond a denial of access and may result in a forfeiture of assets and even imprisonment. They do not fall within the above-discussed territorial sovereignty of the US to simply control ‘ac- cess’ to its territory. In practice, US secondary sanctions that are based on penalties rather than access denials are grounded on four jurisdictional triggers: control by a US company, use of US technology, use of the US financial system, and trafficking in confiscated US property. The question arises whether these triggers are compatible with the customary international law of jurisdiction, as the relevant conduct that is subject to US sanctions appears to be extraterritorial. The regulated economic transactions take place between non-US persons and occur outside the US. For an assertion of prescriptive jurisdiction to be lawful under the customary international law of jurisdiction, a substantial connection is required.73 Relevant connections are territory, nationality, and secur- ity.74 Exceptionally, universal jurisdiction is possible for a limited num- ber of international crimes,75 but is not relevant here since the US does
72 BNP Paribas stood accused of systemically ‘concealing, removing, omitting, or obscuring references to information about U.S.-sanctioned parties in 3,897 financial and trade transactions routed to or through banks in the United States between 2005 and 2012 in apparent violation of the Sudanese Sanctions Regulations, 31 C.F.R. part 538; the Iranian Transactions and Sanctions Regulations, 31 CFR, part 560 (ITSR); the Cuban Assets Control Regulations, 31 C.F.R. part 515; and the Burmese Sanctions Regulations, 31 C.F.R. part 537’: see OFAC, ‘Treasury Reaches Largest Ever Sanctions-Related Settlement with BNP Paribas SA for $963 Million’ (30 June 2014)
1. US corporate control and the nationality principle It is long-standing US sanctions practice to construe the term ‘US per- son’ widely as encompassing US-owned or controlled foreign entities.76 This implies that primary US sanctions do not just apply to entities incorporated in the US, but also to entities incorporated under the laws of a foreign country, provided that they are majority-owned or con- trolled by a US person. Parent corporations are normally liable for viola- tions of sanctions by foreign subsidiaries,77 but under the Cuban sanctions regime foreign subsidiaries themselves may be liable.78 From a jurisdictional perspective, this ‘control theory’ appears to be an improper application of the nationality principle, as in international law the nationality of a corporation is based on its place of incorporation rather than the nationality of its shareholders.79 Accordingly, several European courts hearing contractual disputes have refused to give effect to US secondary sanctions based on the control theory.80
76 See the 1965 case of the US Treasury ordering US corporation Fruehauf to prevent a ship- ment of buses by its French subsidiary to China, which at the time was subject to a US embargo, as discussed in AF Lowenfeld, Trade Controls for Political Ends (M Bender 1983) 92–93. In that case, the US abandoned its enforcement efforts against the US parent after a French court appointed a temporary administration to carry out the transaction between the French subsidiary and China: Fruehauf Corporation v Massardy (1965) 5 ILM 476 (Court of Appeals (Paris)). For the Cuba sanc- tions, see 31 CFR § 515.329. Before the Mack Amendment in 1990, a US policy was in place that allowed the issuance of licenses for foreign subsidiaries of US companies to do business with Cuba. For the Iran sanctions, see 31 CFR § 560.215. 77 22 USC §8725. On prohibited facilitation or approval of a transaction by a foreign person, such as a subsidiary, as a result of acts carried out by a US person, such as a US parent corporation, see 31 CFR §§ 560.208, 560.417. 78 See OFAC, ‘Enforcement Information for February 25, 2016’
2. Prohibiting re-exportation of US items under the nationality principle A second trigger for the application of secondary sanctions going beyond denial of privileges is the re-exportation of US-origin items, typically technology. The US prohibition of re-exporting such items engendered substantial controversy in the early 1980s, after the US enacted the ‘Soviet Pipeline Regulations’ pursuant to which the re-export of US- origin parts, components, or materials to the Soviet Union was prohib- ited.84 These Regulations, which had a severe impact on trade between the European Economic Community (now EU) and the Soviet Union, were denounced by the Community as violations of international law as they purported to regulate transactions taking place wholly outside the US.85 The uproar led President Reagan to lift the sanctions in 1982.86 Nonetheless, extraterritorial export controls reappeared in US second- ary sanction practice. For instance, current US secondary sanctions reg- ulations regarding Iran provide that ‘the reexportation from a third
81 ‘Reimposing Certain Sanctions with Respect to Iran’, Exec Order No 13,846, s 8; ‘Authorizing the Implementation of Certain Sanctions Set Forth in the Iran Threat Reduction and Syria Human Rights Act of 2012 and Additional Sanctions With Respect to Iran’, Exec Order No 13,628, 77 Fed Reg 62,139 (12 October 2012) s 4. 82 US Department of the Treasury, ‘OFAC FAQs: Iran Sanctions’
3. ‘Territorial’ use of the US financial system As discussed above, the US can prohibit, or impose strict conditions on, the opening or maintaining in the US of correspondent accounts for for- eign financial institutions. Such measures have a major impact on for- eign financial institutions but, being access conditions, they fall within
87 31 CFR § 560.205(a). Subsection (b) provides for some exceptions. 88 OFAC, ‘Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and Yantai Jereh Oilfield Services Group Co. Ltd.’ (12 December 2018)
93 OFAC, ‘Treasury Reaches Largest Ever Sanctions-Related Settlement with BNP Paribas SA for $963 Million’. 94 OFAC, ‘U.S. Treasury Department Announces $619 Million Settlement with ING Bank, N.V.’ (6 December 2012)
98 See, notably, Morrison v National Australia Bank 561 US 247 (2010); United States v Hoskins 902 F 3d 69 (2d Cir 2018). 99 Since the strengthening of US sanctions against Iran in 2018, SWIFT itself—the Society for Worldwide Interbank Financial Telecommunication, a Belgian-based financial intermediary—has suspended ‘certain Iranian banks’ from accessing its payment network: see Part VI.D. 100 Apparently, some banks outside the US also clear US dollars, but even these banks are likely to employ OFAC’s list of ‘specially designated nationals’ for fear of falling foul of s 311 of the USA PATRIOT Act, Pub L No 107-56 (2001). Pursuant to this section, the US Treasury can designate a financial institution or jurisdiction as being of ‘primary money laundering concern’, as a result of which it may be prohibited from maintaining correspondent accounts with US financial institutions: See Carter and Farha, ‘Overview and Operation of U.S. Financial Sanctions, Including the Example of Iran’, 909–10. 101 See S Emmenegger, ‘Extraterritorial Economic Sanctions and their Foundation in International Law’ (2016) 33 Arizona Journal of International and Comparative Law 631, 656; T Rensmann, ‘Vo¨lkerrechtliche Grenzen extraterritorialer Wirtschaftssanktionen’ in D Ehlers and H- M Wolffgang (eds), Recht der Exportkontrolle: Bestandsaufnahme und Perspectiven (Deutscher Fachverlag 2015) 105; NN Wilson, ‘Pushing the Limits of Jurisdiction Over Foreign Actors Under the Foreign Corrupt Practices Act’ (2014) 91 Washington University Law Review 1063, 1073, note 49; ‘Developments in the Law – Extraterritoriality’ (2011) 124 Harvard Law Review 1227, 1251, pointing to the ‘dubious permissibility under international law’ of correspondent account jurisdic- tion; M Audit, ‘Sanctions contre BNP Paribas: l’extraterritorialite´ du droit ame´ricain est-elle con- forme au droit international?’ Les Echos (25 June 2014)
4. A private cause of action for trafficking in US property: Reliance on passive personality? A fourth mechanism of enforcing secondary sanctions beyond a denial of privileges is through the creation of a private cause of action for a US person in relation to a non-US person ‘trafficking’ in confiscated prop- erty. This mechanism is bound up with the Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996 (Helms–Burton Act), which imposes secondary sanctions on non-US persons trading with Cuba.108 Title III of the Act creates a private cause of action in US courts for US nationals against any person ‘trafficking’ in confiscated property.109 This means that US courts can hold non-US nationals (including corporations) liable for money damages in an amount that may equal the fair market value of that property.110
2013). See also Bismuth, ‘Pour une appre´hension nuance´ de l’extraterritorialite´ du droit ame´ricain’, 798. 103 See, eg, French President Hollande’s reaction to the 9 billion US dollar fine imposed by US regulators on French bank BNP Paribas: A de Guigne´ and P-Y Dugua, ‘BNP Paribas: Obama refuse de se « meˆler » de l’affaire judicaire’ Le Figaro (5 June 2014)
111 1996 EU Blocking Statute, art 6. 112 The Extraterritorial US Legislation (Sanctions against Cuba, Iran and Libya) (Protection of Trading Interests) Order 1996, SI 1996/3171. 113 Foreign Extraterritorial Measures Act, RSC 1985, c F-29; The Foreign Extraterritorial Measures (United States) Order (1996) SOR/96-84. 114 Ley de Proteccio´n al Commercio y la Inversio´n de Normas Extranjeras que Contravengan el Derecho Internacional (23 October 1996). 115 United States – The Cuban Liberty and Democratic Solidarity Act, Communication from the Chairman of the Panel, WT/DS38/5 (25 April 1997). 116 NGa´mez Torres, ‘U.S. Swats Cuba for Role in Venezuela by Moving closer to Fully Implementing Helms-Burton’ Miami Herald (3 April 2019)
5. Justifying secondary sanctions under the protective principle The previous jurisdictional triggers were all based on a connection with the US—albeit an insufficient one from a public international law per- spective. However, one can imagine a situation in the future in which the US exercises jurisdiction without any connection with the US. In fact, existing clauses in US sanctions legislation could well be inter- preted as applying to non-US persons without a link to the US—apart, perhaps, from such persons purportedly endangering the national secur- ity of the US by trading with sanctions targets. For instance, the Iran Sanctions Act (1996) applies to ‘persons’ in general without a geograph- ical limit.120 Similarly, since a 2007 amendment, the International Emergency Economic Powers Act (IEEPA),121 on which most country-
118 European Commission, ‘Report on United States Barriers to Trade and Investment’ (November 2002) 5; M Cosnard, ‘Les lois Helms-Burton et d’Amato-Kennedy, interdiction de commercer avec et d’investir dans certains pays’ (1996) 42 Annuaire Franc¸ais de Droit International 40, 41–43; Bismuth, ‘Pour une appre´hension nuance´ de l’extraterritorialite´ du droit ame´ricain’, 788; SH Cleveland, ‘Norm Internalization and U.S. Economic Sanctions’ (2001) 26 Yale Journal of International Law 41, 64. The fact that successive US presidents waived Title III of Helms-Burton may speak to a conviction that its provisions were not compatible with international law. 119 For some very circumscribed exceptions for consumer and employment contracts, that do not apply in this context however, see arts 17–23 of Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforce- ment of judgments in civil and commercial matters [2012] OJ L351/1. 120 See, eg, Iran Sanctions Act of 1996, s 14(15). 121 International Emergency Economic Powers Enhancement Act (as amended through Pub L No 110-96 (2007)). 26 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 specific US sanctions programmes are based,122 provides that ‘[i]t shall be unlawful for a person to violate, attempt to violate, conspire to vio- late, or cause a violation of any license, order, regulation, or prohibition’ and goes on to provide for civil and criminal penalties to be imposed on ‘any person’ who commits such an act.123 The IEEPA likewise does not further define the term ‘persons’, raising the spectre that non-US per- sons risk civil and criminal penalties absent any link between their activ- ities and the US, as long as they cause others to violate US sanctions.124 So far, US law-enforcement agencies have refrained from giving such a broad interpretation to US law, instead relying on the aforementioned US connections. However it appears that, under US law, such an inter- pretation would not necessarily be unlawful. In particular, in the afore- mentioned case of US v Reza Zarrab, Judge Berman noted that if the ‘issue of extraterritoriality were to be reached, Zarrab’s argument that IEEPA and [the Iranian Sanctions and Transactions Regulations (ISTR)] do not apply extraterritorially would likely prove unpersuasive ...[where the] law at issue is aimed at protecting the right of the govern- ment to defend itself’125. Lawyers have noted that ‘it is hard to imagine US prosecutors seeking to bring a case against a foreign national where they could not provide the scintilla of evidence required to establish a domestic nexus’.126 However, such a possibility is not excluded either, especially not if the US wants to ramp up the pressure on those who continue to deal with sanctions targets.127 This brings us to the fundamental question of whether US enforce- ment of secondary sanctions legislation, absent a strong territorial or personal connection with the US, could be justified under the protective or security principle, ie, the principle that permits jurisdiction ‘over ali- ens for acts done abroad which affect the internal or external security of other key interests of the state’.128 In fact, a considerable number of US sanctions regulations are premised on the target posing a threat to US national security.129 When President Trump reinstated US sanctions against Iran after denouncing the Joint Comprehensive Plan of Action
122 Rathbone, Jeydel, and Lentz, ‘Sanctions, Sanctions Everywhere’, 1059–60. 123 50 USC § 1705(a). 124 Rathbone, Jeydel, and Lentz, ‘Sanctions, Sanctions Everywhere’, 1112. 125 United States v Reza Zarrab, 18. 126 SM Flicker, J Fiebig, and K Manley, ‘United States of America v. Reza Zarrab: The Long Reach of U.S. Sanctions May Have Just Gotten Longer’ (Paul Hastings LLP, 26 October 2016)
6. Anti-evasion as a jurisdictional ground Some observers may perhaps wish to justify the imposition of secondary sanctions on the ground that such sanctions serve the purpose of pre- venting circumvention of primary sanctions.133 In so doing, they would upgrade the political rationale for the imposition of secondary sanctions, as discussed in Part II, to an independent jurisdictional ground. The US has not officially relied on anti-circumvention or anti-evasion as (inter- national) legal justification for its secondary sanctions, instead seemingly considering national security as an umbrella jurisdictional justification. Still, it is worth inquiring into the persuasiveness of the anti-evasion jus- tification of assertions of extraterritoriality. Anti-evasion is not listed among the traditional grounds of jurisdiction in international law. Still, it has recently been relied on in financial regulation. In her work on new forms of EU extraterritoriality, Joanne Scott has highlighted the use of a novel jurisdictional trigger that ‘is intended to catch artificial behavior designed to evade obligations laid down in EU law’ which, as far as EU financial regulation is concerned, has the effect of ‘requiring third coun- try entities to comply with the measure’s clearing and risk mitigation obligations where this is necessary or appropriate to prevent the evasion of any provision’ of the regulation.134 The anti-evasion jurisdictional ground appears to be quite specific to the field of financial regulation, however. Even if it were to be considered to be transposable, anti- evasion is aimed to capture artificial arrangements designed to evade legal obligations. The relevant Commission Delegated Regulation defines an
130 ‘Reimposing Certain Sanctions with Respect to Iran’, Exec Order No 13,846, preamble (em- phasis added). 131 Helms-Burton Act, 22 USC § 6021(1)(28). 132 See also Cosnard, ‘Les lois Helms-Burton et d’Amato-Kennedy’. Regarding Iran, it does not help that at the time of the US withdrawal from the JCPOA, the director of the CIA was of the view that Iran was technically in compliance with the JCPOA, and that the International Atomic Energy Agency (IAEA) failed to establish a JCPOA violation on the part of Iran: see IAEA Board of Governors, ‘Verification and monitoring in the Islamic Republic of Iran in light of United Nations Security Council resolution 2231 (2015)’ (Doc No GOV/2019/10, 22 February 2019). 133 We would like to extend our thanks to one of the anonymous reviewers for raising this issue. 134 J Scott, ‘The New EU “Extraterritoriality”’ (2014) 51 Common Market Law Review 1343, 1359. 28 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 artificial arrangement as ‘[a]n arrangement that intrinsically lacks busi- ness rationale, commercial substance or relevant economic justification and consists of any contract, transaction, scheme, action, operation, agreement, grant, understanding, promise, undertaking or event’.135 In light of this restrictive definition, regular business transactions between third countries and sanctions targets, which serve a commercial purpose, are unlikely to qualify as artificial arrangements that trigger the applica- tion of a free-standing anti-evasion jurisdictional ground. Arguably, only insofar as evidence is adduced of a person setting up a legal vehicle to deliberately circumvent (primary) sanctions will the targeting state be entitled to exercise jurisdiction based on anti-circumvention. This also appears to be the EU’s understanding of the jurisdictional reach of EU sanctions. In its 2018 Guidelines on Implementation and Evaluation of Restrictive Measures (Sanctions) in the Framework of the EU Common Foreign and Security Policy, it held that ‘[a]n entity incorporated in an EU Member State may not, inter alia, use a company that it controls as a tool to circumvent a prohibition, including where that company is not incorporated in the EU, nor may this entity give instructions to such ef- fect’,136 without considering this to be an example of control-based extraterritoriality.137
C. Concluding observations This part has argued that, for the purposes of assessing the international lawfulness of secondary sanctions, a distinction should be made between restrictions of access to US markets, and civil and criminal penalties imposed on third country persons engaging in sanctionable activities. The former fall within the sovereignty of states; in principle, they do not raise concerns under the customary international law of jurisdiction. The latter, in contrast, raise acute questions of legality under the cus- tomary international law of jurisdiction. It has been argued that the con- nections relied on by the US to justify their assertions of jurisdiction are too tenuous. As a result, such assertions can be considered to fall afoul of the law of jurisdiction. Equally tenuous connections have admittedly been relied on to combat foreign corrupt practices (eg, in the US under the Foreign Corrupt Practices Act)138 but, unlike sanctions, multiple international conventions have explicitly given broad jurisdictional
135 Commission Delegated Regulation 285/2014 of 13 February 2014 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to regulatory tech- nical standards on direct, substantial and foreseeable effects of contracts within the Union and to prevent the evasion of rules and obligations [2014] OJ L85/1, art 3(2). 136 Council of the EU, ‘Guidelines on Implementation and Evaluation of Restrictive Measures (Sanctions) in the Framework of the EU Common Foreign and Security Policy’ (Annex to Doc No 5664/18, 4 May 2018) para 54. 137 ibid, para 52 (‘The EU will refrain from adopting legislative instruments having extra- territorial application in breach of international law’). 138 See, notably, 15 USC § 78dd–3(a). SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 29 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 grants to states to address corruption. For instance, article 4 of the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions provides that ‘[e]ach Party shall take such measures as may be necessary to establish its jurisdiction over the bribery of a foreign public official when the offence is committed in whole or in part in its territory’.139 This provision allows, and even man- dates, states parties to exercise their jurisdiction in cases with a partial, and possibly only minor, territorial connection. This may mean that connections which may in themselves not be substantial enough could derive validity from being embedded in an international convention, and thus from the perception that they embody ‘global values’.140 Such em- beddedness is normally lacking as far as secondary sanctions are concerned.
IV. INTERNATIONAL LEGALITY OF SECONDARY SANCTIONS UNDER 141 CONVENTIONAL LAW
Secondary sanctions do not only raise difficult questions in terms of their legality under general international law, specifically with regard to the restrictions on the exercise of state jurisdiction under customary international law. They are also difficult to reconcile with a range of multilateral and bilateral instruments. Some of these instruments, such as the OECD Code of Liberalisation of Capital Movements,142 belong to the realm of ‘soft law’. More relevant for present purposes, however, are those instruments of a legally binding nature, specifically those that apply in the relationship between the US, on the one hand, and the EU
139 Emphasis added. For broad treaty-based jurisdictional powers over corruption offences, see also art 42 of the UN Convention against Corruption (adopted 31 October 2003, entered into force 14 December 2005) 2349 UNTS 41, which provides for jurisdiction based on territoriality, national- ity, passive personality, security, and aut dedere aut judicare. For a commentary on this provision, see C Ryngaert and F Haijer, ‘Article 42: Jurisdiction’ in C Rose, M Kubiciel, and O Landwehr (eds), The UN Convention against Corruption: A Commentary (OUP 2019). 140 Bismuth, ‘Pour une appre´hension nuance´ de l’extraterritorialite´ du droit ame´ricain’, 795. On the ‘global values’ justification of unilateral assertions of jurisdiction, see also C Ryngaert, Selfless Intervention: The Exercise of Prescriptive Jurisdiction in the Common Interest (OUP 2020, forthcom- ing). However, even for purposes of combating foreign corrupt practices, commentators have argued that some (territorial) connections, such as routing emails via a US server or wire-transferring funds via the US financial system (connections which have also triggered enforcement of US sanctions laws), are too tenuous to ground jurisdiction: A Leibold, ‘Extraterritorial Application of the FCPA under International Law’ (2015) 51 Willamette Law Review 225, 260; S Routh, ‘Tweet to Defeat Government Bribes: Limiting Extraterritorial Jurisdiction under the Foreign Corrupt Practices Act to Combat Global Corporate Corruption’ (2018) 51 Vanderbilt Journal of Transnational Law 625, 647. 141 The authors would like to thank Jacques Bourgeois, Dominic Coppens, and Deepak Raju for helpful feedback on the application of WTO law to secondary sanctions. Any errors remain, of course, our own. 142 OECD, ‘OECD Code of Liberalisation of Capital Movements’ (2019). The Code aims at the abolition of restrictions on movements of capital. Note, however, that the OECD Code does contain a security exception, stating that the Code shall not prevent a Member from taking action which it considers necessary, eg, for the protection of its essential security interests (art 3). 30 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 and/or individual EU Member States, on the other, and whose provi- sions may be breached by (US) secondary sanctions. It is these instru- ments which this part focuses on. In terms of multilateral instruments, worth mentioning are the WTO Agreements, to which both the US and the EU, as well as individual EU Member States, are party. Importantly, the EU has repeatedly taken the position that US secondary sanctions breach US obligations vis-a`-vis the EU under the WTO Agreements.143 Following the adoption of the Helms-Burton Act in 1996, the (then) European Communities (EC) ef- fectively requested the creation of a WTO panel to scrutinize a range of measures introduced by the Act.144 The EC claimed, in particular, that the measures concerned were inconsistent with articles V, XI, and XIII of the General Agreement on Tariffs and Trade (GATT); with articles II, III, VI, XI, XVI, and XVII of the General Agreement on Trade in Services (GATS), as well as with paragraphs 3 and 4 of the GATS Annex on the Movement of Natural Persons.145 Eventually, however, when a political agreement was reached whereby the US agreed not to enforce the Helms-Burton Act against EC persons, the EC suspended their complaint.146 As such, the compatibility of secondary sanctions with WTO law—and, more generally, with international trade and inter- national investment law147—remains as yet largely ‘untested’.148
143 See, eg, Council of the EU, ‘Declaration by the High Representative on behalf of the EU on the full activation of the Helms-Burton (LIBERTAD) Act by the United States’ (2 May 2019)
149 The list of treaties containing a compromissory clause providing for dispute settlement by the ICJ that is available on the ICJ website (see
154 By way of illustration, in a recent WTO case it was held that Russian sanctions restricting the transit of goods from Ukraine contravened the GATT: see Russia – Measures Concerning Traffic in Transit, Panel Report, WT/DS512/R (5 April 2019). Reference can also be made to the alleged breaches of WTO law in several recent requests for consultations lodged by Venezuela, Qatar, and Russia in response to unilateral economic sanctions against them: see, eg, United States – Measures relating to Trade in Goods and Services, Request for Consultations by Venezuela, WT/DS574/1 (8 January 2019); Saudi Arabia – Measures relating to Trade in Goods and Services, and Trade-Related Aspects of Intellectual Property Rights, Request for Consultations by Qatar, WT/DS528/1 (4 August 2017); Ukraine – Measures relating to Trade in Goods and Services, Request for Consultations by the Russian Federation, WT/DS525/1 (1 June 2017). Moreover, in 2018, Iran instituted proceedings before the ICJ against the US pursuant to the US withdrawal from the JCPOA and the re-activation of sanctions against Iran. According to Iran, US sanctions gave rise to various breaches of the 1955 US-Iran Treaty of Amity (Treaty of Amity, Economic Relations, and Consular Rights (adopted 15 August 1955, entered into force 15 August 1955) 284 UNTS 93), including the ‘fair and equitable treatment principle’ (art IV(1)), the prohibition against certain restrictions on payments (art VII(1)), the national treatment and MFN principles (art IX(2)), and the freedom of commerce and navigation (art X(1)): see Alleged Violations of the 1955 Treaty of Amity, Economic Relations, and Consular Rights (Islamic Republic of Iran v United States of America) (Application Instituting Proceedings) [2018] General List No 175. While the case is still pending before the ICJ at the time of writing, in its order on provisional measures, the ICJ did acknowledge that ‘measures adopted by the United States, for example the revocation of licenses and authorizations granted for certain com- mercial transactions between Iran and the United States, the ban on trade of certain items, and limi- tations to financial activities’ were ‘prima facie capable of falling within the material scope of [the Treaty of Amity]’: Alleged Violations of the 1955 Treaty of Amity, Economic Relations, and Consular Rights (Islamic Republic of Iran v United States of America) (Provisional Measures, Order of 3 October 2018) [2018] ICJ Rep 623, para 43. But see BE Carter, ‘Economic Sanctions’, MPEPIL Online (last updated April 2011) para 28: ‘Because many of the recent targets of sanctions are not WTO members ...and because of the exceptions in the GATT agreement ..., the vast majority of the 100-plus uses of economic sanctions in the last three decades have clearly not violated these trea- ties, and other cases are unclear. Moreover, few, if any, of these sanctions arguably violate any bilat- eral treaty, and the questionable cases require further investigation of the facts and the specific treaties.’ 155 Interestingly, the draft Multilateral Agreement on Investment negotiated within the OECD did contain a draft article prohibiting ‘secondary investment boycotts’: see OECD, ‘Draft Consolidated Text’ (Doc No DAFFE/MAI(98)7REV1, 22 April 1998) 125–26. Eventually, how- ever, the project was abandoned altogether for lack of support. 156 See below, however, on the possible impact of the ‘security exception’. A rare exception can indeed be found in NAFTA’s art 309(3), which was introduced with US sanctions against Cuba in SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 33 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 with the analysis in relation to the customary rules on jurisdiction above, a proper analysis under treaty law requires unpacking the various sanc- tions triggers and concomitant consequences in case of breach. Below, we look at some of the main scenarios without in any way claiming exhaustivity. We will address, in turn, the application of the IMF Articles of Agreement (Section A), the WTO Agreements (Section B), and BITs and FCN treaties (Section C), before arriving at a provi- sional conclusion (Section D). Having identified potential violations, the next section (Section E) tackles the impact of the so-called ‘security ex- ception’, which is found both in the WTO Agreements and in virtually all relevant bilateral instruments and which provides leeway for meas- ures ‘necessary’ to protect the state’s ‘essential security interests’. These sections deal only with the substantive legality assessment. The (proced- ural) question of whether potential breaches can be challenged through judicial remedies is explored separately in Part V.B.
A. International monetary law: Secondary sanctions as restrictions on payments At first glance, several US secondary sanctions appear highly problem- atic under article VIII(2)(a) of the IMF Articles of Agreement, accord- ing to which ‘no member shall, without the approval of the Fund, impose restrictions on the making of payments and transfers for current international transactions’. ‘Payments for current transactions’ must be distinguished from capital transfers, restrictions on which are still per- mitted under article VI(3).157 Article XXX provides several (non-ex- haustive) examples of payments for current transactions, including, for instance, ‘all payments due in connection with foreign trade, other cur- rent business, including services, and normal short-term banking and mind: Art 309(3) of NAFTA reads as follows: ‘In the event that a Party adopts or maintains a pro- hibition or restriction on the importation from or exportation to a non-Party of a good, nothing in this Agreement shall be construed to prevent the Party from: (a) limiting or prohibiting the import- ation from the territory of another Party of such good of that non- Party; or (b) requiring as a condi- tion of export of such good of the Party to the territory of another Party, that the good not be re- exported to the non-Party, directly or indirectly, without being consumed in the territory of the other Party.’ As Oyer notes, the clause would appear to allow NAFTA parties to restrict the import- ation or exportation of goods from non-NAFTA countries, such as Cuba, without violating art 309. At the same time, the clauses only cover trade in goods, not services; Oyer, ‘The Extraterritorial Effects of U.S. Unilateral Trade Sanctions’, 458–60. See also s 110(b) of the Helms-Burton Act (22 USC § 6040(b)(2)) which asserts that ‘Article 309(3) [of the NAFTA] permits the United States to ensure that Cuban products or goods made from Cuban materials are not imported into the United States from Mexico or Canada and that United States products are not exported to Cuba through those countries’. Note that a similar clause is found in art 2.11(3) of the United States-Mexico- Canada Agreement (signed 30 November 2018), available at
158 IMF Executive Board, ‘Payments Restrictions’ (Decision No 1034-(60/27), 1 June 1960). 159 In this sense: A Viterbo, International Economic Law and Monetary Measures: Limitations to States’ Sovereignty and Dispute Settlement (Edward Elgar 2012) 172; CC Lichtenstein, ‘The Battle for International Bank Accounts: Restrictions on International Payments for Political Ends and Article VIII of the Fund Agreement’ (1987) 19 NYU Journal of International Law and Politics 981, 985. 160 See US Congressional Research Service, ‘Iran Sanctions’, annexes. 161 See, eg, Bismuth, ‘Pour une appre´hension nuance´ de l’extraterritorialite´ du droit ame´ricain’, 797, 803; NA Simon, ‘The Iranian Assets Control Regulations and the International Monetary Fund Agreement: Are the Regulations “Exchange Control Regulations”’ (1981) 4 Boston College International and Comparative Law Review 203, 221–22. 162 See also Part II.A.2. See, eg, US Congressional Research Service, ‘Iran Sanctions’, 32: ‘On November 6, 2008, the Department of the Treasury broadened restrictions on Iran’s access to the U.S. financial system by barring U.S. banks from handling any transactions with foreign banks that are handling transactions on behalf of an Iranian bank (“U-turn transactions”). This means a foreign bank or person that pays Iran for goods in U.S. dollars cannot access the U.S. financial system (through a U.S. correspondent account, which most foreign banks have) to acquire dollars for any transaction involving Iran.’ 163 See the list of menu-based sanctions under Part II.A.2, which include a ‘prohibition on any credit or payments between the entity and any U.S. financial institution’. For non-US banks, exclu- sion from the US financial market has been dubbed the ‘Wall Street equivalent of the death penalty’: see S Lohmann, ‘Extraterritorial U.S. Sanctions: Only Domestic Courts Could Effectively Curb the Enforcement of U.S. Law Abroad’ (SWP Comment No 5, Siftung Wissenschaft und Politik, February 2019) 4. It arguably constitutes the most powerful tool in the US’s sanctions arsenal. SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 35 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 objectives,164 a 1952 decision of the IMF Executive Board has introduced a specific procedure for granting IMF approval for restrictions imposed on security grounds.165 The decision was inspired, among other things, by the imposition of economic sanctions against the People’s Republic of China and North Korea in 1950,166 its origin (and invocation)167 thus confirming that article VIII(2)(a) is capable of covering a variety of (pri- mary and secondary) sanctions. Crucially, the decision provides that pay- ments restrictions for security reasons must be notified to the IMF either before they are adopted or, when the situation does not allow for advance notice (eg, for reasons of urgency or secrecy), no later than 30 days after their adoption.168 The decision continues by stressing that [u]nless the Fund informs the member within 30 days after receiving notice from the member that it is not satisfied that such restrictions are proposed solely to preserve such security, the member may assume that the Fund has no objection to the imposition of the restrictions. While little-known and understudied, the 1952 decision is of pivotal importance in the present context. Indeed, it effectively entails that when a state notifies measures to the IMF and the Fund does not for- mally object, there will be no breach of article VIII(2)(a) of the IMF Articles of Agreement. An absence of objection is thus equivalent to tacit approval. Moreover, such approval does not expire, nor does it require renewal or review.169 There is also a spill-over effect in the context of article VIII(2)(b) of the IMF Articles of Agreement, as exchange control regulations that are approved by the IMF must be acknowledged and enforced by the courts of an IMF member at the receiving end of such restrictions, even when they are against the essential interests or funda- mental values of their country.170 Viterbo observes in this context that article VIII(2)(b) ‘significantly boosts [the] effectiveness and reach’ of
164 Nor do the IMF Articles of Agreement contain a ‘security exception’ along the lines of, for in- stance, the WTO Agreements (see Part III.F). 165 IMF Executive Board, ‘Payments Restrictions for Security Reasons: Fund Jurisdiction’ (Decision No 144-(52/51), 14 August 1952). The Decision has a broad scope and ‘applies to all restrictions on current payments and transfers, irrespective of their motivation and the circumstan- ces in which they are imposed’. See further MP Malloy, ‘Ou` est votre chapeau? Economic Sanctions and Trade Regulation’ (2003) 4 Chicago Journal of International Law 371, 378, note 32. 166 Lichtenstein, ‘The Battle for International Bank Accounts’, 988. 167 See notes 173 and 174, and accompanying text. 168 If called to a vote, any proposal to challenge the measures is adopted with an ordinary major- ity of the weighted votes cast. See A Viterbo, ‘Extraterritorial Sanctions and International Economic Law’ in ECB, Building Bridges: Central Banking Law in an Interconnected World (ECB 2019) 157, 164. 169 ibid. 170 See further, eg, ibid; Simon, ‘The Iranian Assets Control Regulations and the International Monetary Fund Agreement’, 204ff (discussing the invocation of the so-called ‘Bretton Woods Defence’ in private litigation, specifically with a view to holding the contractual obligations of US banks to repay Iranian deposits unenforceable in British courts; but suggesting, however, that this aspect of the IMF Articles of Agreement may be ultra vires); Lichtenstein, ‘The Battle for International Bank Accounts’, 984ff. 36 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 unilateral security restrictions, and forces countries which do not agree with them to apply them nonetheless.171 From the IMF’s Annual Reports on Exchange Arrangements and Exchange Restrictions (AREAR), it is clear that numerous restrictions have been notified in accordance with the 1952 decision.172 The 2018 re- port, for example, notes that: 19 members notified the IMF of measures introduced solely for security rea- sons during 2017, while 10 members did so during January-September 2018. The number of countries notifying the IMF of such measures dropped from 37 in 2015 and 32 in 2016. For the most part, notification came from advanced economies. In general, the restrictions involved take the form of fi- nancial sanctions to combat the financing of terrorism or financial sanctions against certain governments, entities, and individuals in accordance with [UN] Security Council resolutions or EU regulations.173 Specifically with regard to the US, the US country section of the 2016 AREAR report contains dozens of exchange measures imposed for se- curity reasons in accordance with the 1952 decision.174 The lion’s share of the relevant US legislative and regulatory instruments identified in the report175 deal with blocked accounts, yet the list also includes, for in- stance, measures prohibiting imports from certain entities that prolifer- ate weapons of mass destruction, as well as other ‘measures on payments and transfers for current international transactions’, such as the Iranian Financial Sanctions Regulations. Very little information is available on the use of the procedure set forth by the 1952 decision within the IMF context. Many large-scale sanctions regimes have ostensibly been notified without giving rise to any form of objection within the IMF.176 Existing literature even sug- gests that the Fund has never objected to any notification.177 This is al- together unsurprising: indeed, the preamble to the decision stresses that while ‘[s]ometimes members impose ...restrictions solely for the preser- vation of national or international security’, ‘[t]he Fund does not ...pro- vide a suitable forum for discussion of the political and military
171 Viterbo, ‘Extraterritorial Sanctions and International Economic Law’, 165. 172 The Annual Reports are available on the IMF website at
178 IMF Executive Board, ‘Payments Restrictions for Security Reasons’. 179 ibid. 180 Viterbo, International Economic Law and Monetary Measures, 172, 174. 181 Lichtenstein, ‘The Battle for International Bank Accounts’, 992; Viterbo, ‘Extraterritorial Sanctions and International Economic Law’, 165–66. 182 Viterbo, ‘Extraterritorial Sanctions and International Economic Law’, 165. 183 Note: the authors have been unable to access the country compilation of the 2018 IMF Annual Report on Exchanges Restrictions. Only the general part of the 2018 report is publicly available. 184 See also Perben and others, ‘The American Withdrawal from the Vienna Agreement on the Iran Nuclear Programme’, 55. 185 Note that case law pertaining to art XI GATS is virtually non-existent. In United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services, Panel Report, WT/ DS285/R (10 November 2004) paras 6.440–41, the panel notes that ‘Article XI has not, as yet, been the subject of interpretation or application by either panels or the Appellate Body’. At the same time, the panel emphasizes ‘that Article XI plays a crucial role in securing the value of specific com- mitments undertaken by Members under the GATS. Indeed, the value of specific commitments on market access and national treatment would be seriously impaired if Members could restrict inter- national transfers and payment for service transactions in scheduled sectors. In ensuring, inter alia, that services suppliers can receive payments due under services contracts covered by a Member’s specific commitment, Article XI is an indispensable complement to GATS disciplines on market ac- cess and national treatment’. 38 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 states once they use the US dollar.186 FCN treaties also contain partly analogous clauses. Thus, article 10(2) of the US-Belgium FCN Treaty excludes ‘exchange restrictions’, ‘except to the extent necessary to main- tain or restore adequacy to its monetary reserves’.187 Article 10(4) adds that exchange restrictions ‘shall not be imposed by either Party in a manner unnecessarily detrimental ... to the claims, investments, trans- port, trade and other interests of the nationals and companies of the other Party’. The term ‘exchange restrictions’ is understood broadly as encompassing all restrictions ‘which burden or interfere with payments, remittances, or transfers of funds or financial instruments between the territories of the two Parties’ (article 10(5)). Just as asset freezes and far-reaching US restrictions on dollar trans- actions appear prima facie incompatible with article VIII(2)(a) of the IMF Articles of Agreement, so too would they appear to be contrary to article XII GATS and comparable clauses in the FCN treaties. At the same time, it must be stressed that these clauses tend to contain a built- in referral to the IMF regime. Thus, article XI(2) GATS asserts that: [n]othing in this Agreement shall affect the rights and obligations of the members of the [IMF] under the Articles of Agreement of the Fund, pro- vided that a Member shall not impose restrictions on any capital transactions inconsistently with its specific commitments regarding such transactions, ex- cept under Article XII or at the request of the Fund. Likewise, article 10(2) of the US-Belgium FCN Treaty holds that it does ‘not ... preclude imposition by either Party of particular restric- tions whenever the Fund specifically so authorizes or requests’. These clauses could be interpreted in two ways. According to the first, they could be read as implying that, whenever a payment restriction has been approved, or at least ‘not objected to’, by the IMF, it will not contravene the GATS or FCN clauses either. Alternatively, the opposite reading would be that an absence of objection by the IMF is not equiva- lent to a ‘request of the Fund’ (per article XI(2) GATS) or a ‘specific’ authorization or request (in the sense of article 10(2) of the US-Belgium FCN Treaty) so that the mere (and non-objected) notification of a pay- ment restriction to the IMF pursuant to the 1952 decision does not of it- self preclude a breach of the latter instruments. Textually, at least, the latter interpretation appears the more compelling, albeit that the inter- action between the IMF rules, on the one hand, and the GATS and FCN clauses, on the other, remains as yet untested in judicial practice.
186 Perben and others, ‘The American Withdrawal from the Vienna Agreement on the Iran Nuclear Programme’, 55. 187 US-Belgium FCN Treaty (Treaty of Friendship, Establishment and Navigation (adopted 21 February 1961, entered into force 3 October 1963) 480 UNTS 149) art 10(2). The provision further stipulates that it does not alter the obligations of either state in the IMF context. Similar clauses can be found in other FCN treaties concluded between the US and (Western) European countries. SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 39 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 B. Secondary sanctions and WTO law Leaving aside restrictions on international payments in various forms, how do secondary sanctions fare under international trade law, especial- ly under the two fundamental principles of WTO law, namely the prin- ciple of ‘national treatment’ and the ‘most-favoured nation’ (MFN) principle? More specifically, do policies that seek to restrict the trade be- tween the primary sanctions target (eg, Iran or Cuba) and third coun- tries (eg, EU Member States) ipso facto contravene either of these principles? This is the question addressed in Section 1. Subsequent sec- tions then turn to the compatibility of secondary sanctions with the GATT’ prohibition of quantitative restrictions (Section 2) and other rules of WTO law (Section 3).
1. National treatment and most-favoured nation treatment With respect to the MFN principle, article I GATT prescribes that goods from one WTO member must be treated no less favourably than ‘like product[s] originating in or destined for the territories of all other contracting parties’. Article II(1) GATS restates this principle in re- spect of ‘like’ services and service suppliers.188 In turn, the national treatment principle enshrined in article III GATT prohibits internal taxes and other internal charges or regulations that discriminate between imported products and ‘like domestic products’.189 To a more limited extent, article XVII GATS provides for a similar prohibition of dis- crimination between services and service suppliers of other WTO mem- bers and ‘its own like services and service suppliers’, at least for those sectors inscribed in a member’s Schedule of Commitments.190 Discrimination in the sense of the national treatment and MFN princi- ples can be both de jure as well as de facto.191 Clearly, when a WTO member prohibits companies established in a specific third country from importing goods (eg, oil or sugar) into its ter- ritory, or prohibits its own companies from exporting goods or services (eg, maintenance services in the civil aviation sector) to that specific country (but not to others), this would normally give rise to a prima facie
188 Note that pursuant to art II(2) GATS, measures inconsistent with the MFN principle may, however, be maintained inasmuch as they are listed in, and meet the conditions of, the Annex on Article II Exemptions. 189 Art III GATT disciplines also extend to directly competitive and substitutable products. 190 Under the GATS, national treatment applies only when the WTO member in question has made a specific commitment for the sector and mode of supply at issue, and subject to the conditions and qualifications set out in its Schedule of Commitments. 191 In this sense, see, eg, European Communities – Regime for the Importation, Sale and Distribution of Bananas, Appellate Body Report, WT/DS27/AB/R (9 September 1997) paras 233– 34. 40 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 breach of the MFN principle,192 at least where the primary sanctions target is a WTO member (such as Cuba).193 The more difficult question is whether a secondary sanctions regime through which a state seeks to undermine trade between the primary sanctions target and third countries could also, in and of itself, breach the above principles. Some authors appear to answer in the affirma- tive.194 Others note, arguably more correctly, that it would be erroneous to regard the mere extraterritorial dimension of US sanctions legislation as resulting ipso facto in a breach of WTO law.195 Taken at face value, US secondary sanctions do not appear to treat imported goods or services less favourably than ‘like’ domestic goods or services (on the contrary, domestic goods and services are generally subject to more far-reaching restrictions); nor do they appear to discriminate be- tween ‘like’ products or services from different WTO members (other than, perhaps, the primary sanctions target itself). In the words of Viterbo: the violation of the non-discrimination principle cannot be readily claimed by countries targeted by secondary sanctions. The latter do not infringe the most-favoured nation principle as all countries other than the one directly targeted are treated alike. As for the national treatment, domestic and imported products are subject to the same conditions.196 In a similar vein, with regard to the closure of the US market to prod- ucts incorporating Cuban property pursuant to the Helms-Burton Act, Spanogle notes how domestic products incorporating Cuban property are just as subject to Helms- Burton sanctions as E.U. products incorporating the same Cuban property. Whatever its faults may be, the purpose of the Helms-Burton Act is not to afford protection to the United States domestic sugar industry, or any other domestic in- dustry. Thus, Article III [GATT]... does not appear to be violated ...197
192 Assuming that the security exception does not apply. On this issue, see Part III.F below. 193 Note that Cuba has long been a member of the WTO. Iran, by contrast, is not. Whether such a breach can be challenged before the WTO Dispute Settlement Body, not only by the primary tar- get itself but also by other WTO members, is a separate question related to the requirement of locus standi. See Part IV.B.1 below. 194 Singh, ‘WTO Compatibility of United States’ Secondary Sanctions’, 7: ‘Thus, if the United States chooses to impose sanction [sic] against select countries and not all, it will be in violation of its obligations under Article I, GATT 1994’. 195 Bismuth, ‘Pour une appre´hension nuance´ de l’extraterritorialite´ du droit ame´ricain’, 804–805. Also Spanogle, ‘Can Helms-Burton be Challenged under WTO?’, 1319–20. 196 Viterbo, ‘Extraterritorial Sanctions and International Economic Law’, 166. In a similar vein, see Oyer, ‘The Extraterritorial Effects of U.S. Unilateral Trade Sanctions and Their Impact on U.S. Obligations under NAFTA’, 461, finding that ‘so long as U.S. secondary boycott laws do not treat Canada or Mexico any differently than they treat any other country, the U.S. secondary boy- cott laws do not violate’ NAFTA’s MFN clause (s 1103). 197 Spanogle, ‘Can Helms-Burton be Challenged under WTO?’, 1320. In a similar vein, Spanogle finds no discrimination between like products from different countries (other than Cuba itself): ibid, 1319–20. SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 41 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 Admittedly, it is possible that some form of discrimination could occur in the application of secondary sanctions. De facto discrimination might arise, for instance, if it were demonstrated that US secondary sanctions against Cuba would have a far greater impact on the EU, as opposed to other WTO members, eg, because of major EU investments in Cuba. In a similar vein, Bismuth envisages a possible breach of the national treatment principle if it were established that foreign entities are de facto exposed to higher financial sanctions than American compa- nies,198 although this would require an in-depth statistical analysis of the amounts of the fines imposed on US and non-US companies re- spectively.199 Exceptionally, the application of secondary sanctions may even be overtly discriminatory. Thus, under section 4(c)(I)(B) of the Iran Sanctions Act, the US President can adopt a country-specific wai- ver from sanctions for all companies whose governments are determined to be cooperating with the US in preventing Iran from acquiring weap- ons of mass destruction. Further, pursuant to section 1245 of the National Defense Authorization Act for the Fiscal Year 2012,200 a num- ber of countries, such as China, effectively received a temporary waiver from the US authorities to continue importing oil from Iran,201 at least until these waivers were revoked in mid-2019.202 At the same time, it would be erroneous to regard any form of (de facto or de jure) discrimination in the application of secondary sanctions as automatically constituting discrimination between like products (or services) in the sense of articles I or III GATT (or the analogous provi- sions in the GATS). Thus, the national treatment principle does not op- erate in splendid isolation; rather, it must naturally be tied to some form of trade (in goods or services) with the author of the discriminatory measures (here the US). In particular, article III GATT only covers in- ternal measures discriminating between domestic products of the state adopting sanctions and ‘imported products’, that is, products imported into the sanctioning state. Does the requirement of a trade nexus with the sanctioning state also apply in respect of the MFN principle? At least textually, article I GATT is potentially open to a broader interpretation. In particular, the
198 Consider, in this context, United States – Section 337 of the Tariff Act of 1930, Panel Report, L/6439 – 36S/345 (7 November 1989) (relating to a situation where a judicial procedure treats imported goods less favourable than domestic goods, particularly in the context of patent infringe- ment procedures). 199 Bismuth, ‘Pour une appre´hension nuance´ de l’extraterritorialite´ du droit ame´ricain’, 805. 200 Pub L No 112-81 (2011) (NDAA). 201 The waiver is made contingent on the third countries concerned ‘significantly’ reducing their oil purchases from Iran. The banks of countries that were given a ‘significant reduction exception’ (SRE) could continue to conduct transactions with the Central Bank of Iran or with any sanctioned Iranian bank. US Congressional Research Service, ‘Iran Sanctions’, 28; ‘Iran Sanctions: US Grants Oil Exemptions for Several Countries’ DW (5 November 2018)
203 Mutatis mutandis, a similar argument could be developed in respect of art II GATS (at least in respect of measures covered by the GATS). 204 22 USC § 6040(a)(3). 205 Spanogle, ‘Can Helms-Burton be Challenged under WTO?’, 1323–25; WTO Agreement on Rules of Origin, available at
2. The prohibition of quantitative restrictions Article XI(1) GATT provides that [n]o prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licenses or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party. Several scholars have argued that specific secondary sanctions contra- vene article XI(1) GATT, notably those involving a ban on obtaining licences within the US208 or a ban on imports in the US209 vis-a`-vis cer- tain companies that conduct business with the primary sanctions tar- get.210 Others have pondered whether a secondary boycott may ipso facto breach article XI(1).211 Clearly, a ban imposed by one WTO member (here the US) on the import into its own territory of certain goods (eg, rum, sugar, and cigars) from ‘any other contracting party’ (read: a WTO member, such as Cuba) prima facie breaches article XI GATT, in addition to contraven- ing the MFN principle discussed above.212 A related, yet separate, question is whether the prohibition in article XI(1) GATT could extend to ‘prohibitions or restrictions’ which a WTO member de facto imposes in respect of import and export flows between two other WTO members, namely the primary sanctions target (eg, Cuba) on the one hand, and other states subject to secondary sanc- tions (eg, the EU Member States) on the other. In other words, are sec- ondary sanctions incompatible with article XI(1) GATT as a matter of principle—at least where the primary target is also a WTO member—or not? Those arguing in the affirmative might point out that the text of
207 As far as services are concerned, such sanctions may, for instance, pertain to the offering of banking services in the US from abroad, or the opening of a branch in the US. 208 Perben and others, ‘The American Withdrawal from the Vienna Agreement on the Iran Nuclear Programme’, 56. 209 Bismuth, ‘Pour une appre´hension nuance´ de l’extraterritorialite´ du droit ame´ricain’, 805. 210 Consider also Singh, ‘WTO Compatibility of United States’ Secondary Sanctions relating to Petroleum Transactions with Iran’, 8/22 (construing s 1245 of the NDAA as a de facto import pro- hibition in violation of art XI(1) GATT). 211 See Spanogle, ‘Can Helms-Burton be Challenged under WTO?’, 1321–22. 212 The same would hold true mutatis mutandis for a ban on the export of goods from the sanc- tioning state to another WTO member. Again, whether such a breach can be challenged before the WTO Dispute Settlement Body, not only by the primary target but also by other WTO members, is a separate question related to the requirement of locus standi, to which we will return below in Part IV.B.1. 44 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 article XI(1) GATT does not explicitly require that the prohibition or restriction concerned relate to import or export flows with the sanctioning state itself. Just as we discussed with respect to the MFN principle above, however, the counter-argument would be that, having regard to the context and aim of the provision, the requirement of such a nexus to actual trade with the sanctioning state must be deemed implicit in article XI(1) GATT. Actual cases involving breaches of article XI(1) GATT have so far exclusively concerned restrictions on the import of goods to, or their export from, the actual state adopting those restrictions. By con- trast, there have been no GATT/WTO proceedings as of yet establish- ing that secondary sanctions violate article XI213 (even if the reasons for this may be manifold).214 If one assumes that sectoral secondary sanctions affecting other WTO members are not a priori contrary to article XI GATT, the question remains whether the ‘sticks’ through which the sanctioning state enfor- ces—or threatens to enforce—such secondary sanctions may nonetheless give rise to a breach of article XI GATT, at least inasmuch as these sticks themselves are related to trade in goods with the sanctioning state. Most obviously, one of the so-called menu-based sanctions applied by the US effectively provides for ‘restrictions on imports’ from the sanc- tioned entity. Let us assume, for example, that a French company selling automotive equipment to Iran is in turn subject to the abovementioned menu-based sanction and is, in particular, excluded from selling its products to the US.215 Does this constitute a potential breach of article XI(1) GATT? On the one hand, one might argue that the exclusion of a foreign (in this case, French) company from importing into the US does not qualify as a ‘measure’ because it is targeted against a single undertak- ing, rather than constituting a restriction having general application. On the other hand, it could be argued that, underpinning the individual sanction against this specific undertaking is a more general restriction, pursuant to which the trade in automotive equipment to the US is de facto made contingent on the requirement that companies established in other countries do not sell such equipment to Iran.216 All in all, it is plausible that the menu-based sanction at hand could be regarded as a ‘restriction on importation’ in the sense of article XI(1) GATT. The notion of ‘restrictions’ in article XI(1) GATT must be understood as being ‘comprehensive’, and encompasses ‘all measures instituted or maintained by a contracting party prohibiting or restricting the importation, exportation ... of products other than measures that take the form of duties, taxes or other charges’, irrespective of the ‘legal
213 In a similar sense, see Spanogle, ‘Can Helms-Burton be Challenged under WTO?’, 1322. 214 See further Part V.B.1. 215 The fact that Iran is not a member of the WTO itself is not relevant here; the relevant ques- tion is whether the resulting menu-based sanctions can be regarded as a quantitative restriction imposed by one WTO member (the US) on another (France). 216 See also the text accompanying note 231 below. SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 45 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 status of the measure’.217 Furthermore, it is not limited to direct ‘legally binding obligations’ in respect of import and export, but equally encom- passes government action operating ‘in a manner equivalent to manda- tory requirements’ and creating ‘sufficient incentives or disincentives for [the] non-mandatory measures to take effect’.218 Still, additional challenges remain, illustrating that we are navigating uncharted waters. First, there is the question of whether the menu- based sanctions qualify as ‘measures at the border’ or rather as ‘internal measures’, that is, measures that apply to products after they have legal- ly entered the market.219 The latter are implicitly permitted under art- icle III GATT insofar as they are non-discriminatory (as between domestic and imported products).220 The distinction between ‘internal measures’ and measures taken ‘at the border’ may, however, be difficult to draw. In India-Autos, the panel suggested that article III is engaged where opportunities in the domestic market are affected, while article XI is engaged where the opportunities for importation itself are affected.221 In the present case, it could be argued, for instance, that sec- tions 3 and 5 of Executive Order 13846, providing for menu-based sanc- tions for companies that sell ‘significant’ goods ‘in connection with the automotive sector in Iran’ are not limited in scope to non-US persons, but apply equally to both US and non-US persons. On the other hand, a menu-based sanction consisting of an actual prohibition of imports into the US, and which is unrelated to the intrinsic features of the product or the production process, by its nature seems to affect the opportunities for importation in the sense of article XI(1) GATT. Second, does a breach of article XI(1) GATT presuppose an effect on trade flows? In one dispute, the panel held that the complainant was required to show that a measure had trade effects.222 If such an approach is upheld, it may be more difficult to frame the menu-based sanctions as potentially infringing article XI(1) GATT. After all, the deterrent effect of these sanctions has been such that many European companies have halted their trade with Iran, rather than risk losing access to the US market. In other words, they have not resulted in a direct and actual
217 Note Japan – Trade in Semi-Conductors, Panel Report, L/6309 – 35S/116 (4 May 1988) para 104–108. 218 ibid, para 109. 219 M Matsushita and others, The World Trade Organization: Law, Practice and Policy (3rd edn, OUP 2015) 240. 220 ibid. A footnote to art III GATT indeed indicates that laws, regulations, and requirements that apply to both domestic and imported products, when enforced in the case of imported products at the time of importation, are to be governed by the provisions of art III. See M Trebilcock, R Howse and A Eliason, The Regulation of International Trade (4th edn, Routledge 2013) 281; see also, eg, European Communities – Measures Affecting Asbestos, Panel Report, WT/DS135/R (18 September 2000) paras 8.83–85. 221 India – Measures Affecting the Automotive Sector, Panel Report, WT/DS146/R, WT/DS175/ R (13 November 2002) para 7.224. 222 Argentina – Measures Affecting the Export of Bovine Hides, Panel Report, WT/DS155/R (19 December 2000). 46 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 effect on trade between the EU and the US. On the other hand, certain WTO cases suggest that under article XI(1), what matters is the ‘design of the measure and its potential to adversely affect importation, as opposed to a standalone analysis of the actual impact of the measure on trade flows.’223 If a potential impact on trade suffices, a stronger argu- ment can be made that a breach of article XI(1) GATT is indeed at stake.
3. Other potential breaches of WTO law As explained in Part III.A, the US employs a variety of menu-based sanctions vis-a`-vis foreign companies (both financial and other institu- tions) that ignore US secondary boycotts. The relevant rules do not dir- ectly ‘prohibit’ foreign companies from conducting business with the country targeted by primary sanctions in the sense that such transactions would give rise to civil or criminal liability in the US. Rather, the menu- based sanctions entail various forms of exclusion from, or denial of ac- cess to, the US market. Executive Order 13846 serves as a useful illus- tration. Pursuant to sections 3 and 4 of the Executive Order, foreign companies selling automotive equipment to, or purchasing petroleum products from, Iran, find themselves exposed to, eg, exclusion from pro- curement contracts in the US, exclusion from receiving trade licences, prohibition from importing goods or services into the US, freezing of property and interests in the US, or the denial of visas to corporate offi- cers of the company.224 In turn, ‘foreign financial institutions’ that knowingly conduct or facilitate any significant financial transaction, eg, for the supply of automotive equipment to or the purchase of petroleum products from Iran, may be prohibited from maintaining a correspond- ent account or a payable-through account in the US, thus effectively excluding the institution from the US financial market. The underlying message is clear: foreign companies must choose to do business either with Iran or the US, but they cannot have it both ways. Above, we saw that denial of access measures are, on the whole, un- likely to constitute an unlawful exercise of jurisdiction under customary international law. From a WTO law perspective, however, a different picture emerges. In addition to the potential breach of article XI(1) GATT discussed above, specific menu-based sanctions may also sit un- easily with other WTO rules. The exclusion from the US procurement market, for instance, is diffi- cult to reconcile with the revised 1994 Agreement on Government Procurement (GPA), a plurilateral agreement to which both the US and
223 Colombia – Indicative Prices and Restrictions on Ports of Entry, Panel Report, WT/DS366/R (27 April 2009) para 7.240. 224 See the list of menu-based sanctions in ‘Reimposing Certain Sanctions with Respect to Iran’, Exec Order No 13,846, ss 4–5. SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 47 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 the EU are parties.225 Most strikingly, article VIII(1) of the revised GPA decrees that ‘[a] procuring entity shall limit any conditions for par- ticipation in a procurement to those that are essential to ensure that a supplier has the legal and financial capacities and the commercial and technical abilities to undertake the relevant procurement’. Admittedly, article VIII(4) adds that a party may exclude a supplier on grounds such as ‘final judgments in respect of serious crimes or other serious offences’ (paragraph (d)) or ‘professional misconduct or acts or omissions that ad- versely reflect on the commercial integrity of the supplier’ (paragraph (e)). Still, it is difficult to see, for example, how the fact that a company engages in certain trade with Iran (eg, by selling motor engines for com- mercial vehicles) could provide a ground for exclusion in the sense of the aforementioned exceptions. It is worth recalling in this context that a ‘sanctionable activity’ in the sense of US Executive Order 13846 is not the same as an ‘offence’, and that article VIII(4)(d), moreover, requires a ‘final judgment’. Nor does it seem plausible to construe an exclusion from procurement vis-a`-vis companies engaging in trade with specific states (eg, with Iran) as a (permissible) technical specification pertaining to the ‘processes and methods [of] production or provision’ of the goods or services to be procured.226 An interesting precedent in this context concerns a 1996 act adopted by the State of Massachusetts in response to human rights violations in Myanmar, and which forbade state entities from procuring goods and services from any person doing business with Myanmar.227 Considering the measure to be inconsistent with the GPA, the EC and Japan chal- lenged it at the WTO.228 The panel proceedings were, however, sus- pended when the Act was attacked before the US domestic courts, and was eventually struck down by the US Supreme Court.229 Interestingly, while the reasoning in Crosby v National Foreign Trade Council was based on considerations of domestic US law (viz, the existence of a con- flict between the state law and federal regulations), the Supreme Court did draw attention to the fact that the contested act had embroiled the
225 Nothing in the US coverage schedules would seem to provide for a carve-out relevant in the present context: WTO, ‘Coverage Schedules’
230 ibid 383. The judgment notes that, in its amicus curiae brief, the EU had specifically stated that it would begin new WTO proceedings should the Act be upheld by the Supreme Court. 231 Consider, by analogy, Japan – Trade in Semi-Conductors, L/6309 – 35S/116, para 111. 232 See note 42. 233 Entry for such persons is limited to a three-year period that may be extended for up to two additional years for a total term not exceeding five years. Consolidated information on countries’ commitments and exemptions on movement of natural persons can be found in the WTO services database at
234 See further J Bast, ‘Annex on Movement of Natural Persons Supplying Services under the Agreement’ in R Wolfrum, P-T Stoll, and C Feina¨ugle (eds), WTO: Trade in Services (Martinus Nijhoff 2008) 573–95. 235 ibid 594. 236 Interestingly, inasmuch as a state has undertaken market access commitments for a given sec- tor, footnote 8 to art XVI GATS makes clear that cross-border movement of capital is an essential part of those services and is equally protected, at least with respect to GATS modes 1 (cross-border supply of services) and 3 (commercial presence): P Delimatsis and M Molinuevo, ‘Article XVI GATS: Market Access’ in R Wolfrum, P-T Stoll, and C Feina¨ugle (eds), WTO: Trade in Services (Martinus Nijhoff 2008) 367, 373. 237 The US Schedule of Commitments is available at
239 T Cottier and M Oesch, International Trade Regulation (Cameron May 2005) 831. 240 P Delimatsis and M Molinuevo, ‘Article XVI GATS’, 378. 241 22 USC § 6040(a). 242 Spanogle, ‘Can Helms-Burton be Challenged under WTO?’, 1321. According to art V(2) GATT, ‘[t]here shall be freedom of transit through the territory of each contracting party, via the routes most convenient for international transit, for traffic in transit to or from the territory of other contracting parties. No distinction shall be made which is based on the flag of vessels, the place of origin, departure, entry, exit or destination, or on any circumstances relating to the ownership of goods, of vessels or of other means of transport’. 243 ibid. 244 Perben and others, ‘The American Withdrawal from the Vienna Agreement on the Iran Nuclear Programme’, 57. 245 The parallel clause in the GATS (article III(1)) merely requires in more general terms that members ‘publish promptly ...all relevant measures of general application...’. 246 cf OFAC’s ‘Iran sanctions’ page, which lists no fewer than 23 executive orders and 11 stat- utes, not to mention guidances, licenses, etc:
C. Potential breaches of bilateral instruments In order to verify whether, and to what extent, secondary sanctions en- tail breaches of conventional law, reference must not only be made to multilateral instruments, such as the WTO Agreements, but also to bi- lateral treaties binding upon the sanctioning state. In particular, the BITs and FCN treaties concluded between the US and individual European countries contain a range of obligations that are potentially affected. Some of the relevant clauses overlap (at least partly) with those found in the multilateral instruments discussed above. For instance, the na- tional treatment and MFN principles do not only feature in the WTO Agreements, but also surface—in various shapes and forms—in FCN treaties and BITs to which the US is a party. By way of illustration, nu- merous provisions of the 1961 US-Belgium Treaty of Friendship, Establishment and Navigation247 give expression to the principle of na- tional treatment by stating that the parties should not discriminate be- tween their own nationals and the nationals of the other party, eg, in tax matters (article 9) or in relation to access to court (article 3). It also pro- vides for a right of vessels of one party to enter the ports of the other party ‘on equal terms with vessels of the other Party and on equal terms with vessels of any third country’, referring expressly to ‘national treat- ment’ and ‘most-favoured-nation treatment’.248 References to the na- tional treatment and MFN principles can similarly be found in BITs.249 However, inasmuch as secondary sanctions are mostly applicable in a non-discriminatory manner to US persons and foreign companies alike, a breach of these clauses appears to be prima facie excluded. In a similar vein, FCN Treaties tend to include an obligation for ei- ther party to permit nationals of the other party to enter their territory and reside therein ‘for the purpose of carrying on trade between the two countries and engaging in related commercial activities’.250 In turn,
247 US-Belgium FCN Treaty. 248 ibid, arts 12 and 13. 249 See, eg, arts II(1) and IV of the US-Croatia BIT (Treaty between the Government of the United States of America and the Government of the Republic of Croatia Concerning the Encouragement and Reciprocal Protection of Investment (signed 13 July 1996, entered into force 20 June 2001) TIAS 01-620). 52 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 BITs often require states to permit nationals of the other party to enter and to remain in their territory for the purpose of, eg, establishing, developing, or administering an investment.251 Are the above clauses breached when a state denies entry to corporate officers of foreign com- panies that conduct trade with the primary sanctions target? Admittedly, the clauses are not framed in absolute terms, but normally contain a reservation allowing states to adopt ‘laws relating to the entry and sojourn of aliens’.252 It is doubtful, however, whether the denial of visas in the context of a secondary sanctions regime is covered by this standard formula. In addition, it is questionable whether such a sanction could qualify as a measure ‘necessary to maintain public order and pro- tect the public health, morals and safety’.253 Apart from the foregoing, there are a range of rules commonly found in FCN treaties and BITs which could be invoked to challenge the legal- ity of secondary sanctions affecting the property of nationals and compa- nies of the other contracting party.254 One such rule relates to expropriation. In particular, BITs and FCN treaties typically prescribe that expropriation can only take place for a public purpose; in a non- discriminatory manner; in accordance with due process; and upon pay- ment of prompt, adequate, and effective compensation.255 Importantly, many BITs extend this rule to cases of ‘indirect’ expropriation256 where there is an equivalent effect on property, even though the owner retains the formal title. A second rule concerns the ‘full protection and security’ (FPS) standard,257 which contains both a negative and a positive compo- nent, thus also requiring states to take active measures to protect foreign property or investments from adverse effects.258 Importantly, while the FPS standard primarily seeks to ensure protection against physical dam- age and violence, it also extends to cover entitlements to legal rights, and requires the host state to guarantee ‘legal’ security.259 Other standards
250 US-Belgium FCN Treaty, art 2(1). 251 See, eg, US-Croatia BIT, art VIII. 252 See, eg, US-Croatia BIT, art VIII(1)(a); US-Belgium FCN Treaty, art 2(1). 253 US-Belgium FCN Treaty, art 2(5). Note that this question is separate from the possible ap- plication of the security exception which is also commonly found in BITs and FCN Treaties: see further Part IV.E.1. 254 P-E Dupont, ‘The Arbitration of Disputes related to Foreign Investments affected by Unilateral Sanctions’ in AZ Marossi and MR Bassett (eds), Economic Sanctions in International Law (TMC Asser Press 2015) 197; EJ Criddle, ‘Humanitarian Financial Intervention’ (2013) 24 EJIL 583, 592. 255 See, eg, US-Belgium FCN Treaty, art 4(3); US-Croatia BIT, art III(1). 256 See, eg, US-Croatia BIT, art III(1). 257 See, eg, US-Croatia BIT, art II(3)(a); US-Belgium FCN Treaty, art 4(1). 258 P-E Dupont, ‘The Arbitration of Disputes related to Foreign Investments affected by Unilateral Sanctions’, 205. 259 D Collins, An Introduction to International Investment Law (CUP 2016) 144; P-E Dupont, ‘The Arbitration of Disputes related to Foreign Investments affected by Unilateral Sanctions’, 205– 206. Note that art 4(1) of the US-Belgium FCN Treaty frames the FPS standard in terms of ‘full legal and judicial protection’. SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 53 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 which regularly surface in the instruments concerned—although the exact wording may differ—include the principle of ‘fair and equitable treatment’ of investments, the protection of ‘legitimate expectations’, and the prohibition of arbitrary and discriminatory measures.260 At the risk of stating the obvious, it is worth observing that, at least as far as the BIT clauses are concerned, the (alleged) breach must be tied to a covered ‘investment’ within the meaning of the relevant BIT. While a universally agreed definition of the term is lacking, and different trea- ties may define the concept differently, an ‘investment’ presupposes an element of duration. Apart from the opening of a local subsidiary, it may extend to contractual rights, including concessions, as well as rights con- ferred pursuant to law, such as licences and permits.261 As to financial services, Dupont notes how ‘banking activities such as the provision of loans are an undisputed form of investment in the meaning of BITs ... and ... it is widely admitted that financial instruments such as loans or the purchase of bonds may qualify as investments’.262 Insofar as investments affected by secondary sanctions are located, first and foremost, in the country directly targeted by sanctions and, as such, are not protected by a possible investment agreement hypothetic- ally concluded between the sanctioning country and the investor’s coun- try, this substantially limits the extent to which investors may be able to invoke a BIT as a shield against secondary sanctions.263 Still, upon closer scrutiny, there are various ways in which secondary sanctions may affect a covered investment. This may be the case, for instance, where sanctions render existing contracts null on grounds of illegality, without leaving room for a claim for performance or damages.264 Another possi- bility is that a European company is ordered to pay compensation on the basis of Title III of the Helms-Burton Act because of its supposed in- vestment in expropriated US property in Cuba, and subsequently finds its US assets seized in enforcement proceedings.265 Furthermore, another obvious illustration concerns the imposition of an asset freeze. A (lengthy) asset freeze could indeed qualify as a form of indirect expropriation of property without compensation, depriving the owner of effective use, even if legal title remained.266 That said, the case
260 See, eg, US-Croatia BIT, art II(3)(a)-(b); US-Belgium FCN Treaty, art 4(2). As far as the FET principle is concerned, it may be recalled that in the Oil Platforms case, the ICJ asserted that the FET clause in the Iran-US 1955 Treaty of Amity did ‘not include any territorial limitation’ and accordingly had a wider scope than, eg, the clause on expropriation: Case Concerning Oil Platforms (Islamic Republic of Iran v United States) (Preliminary Objections) [1996] ICJ Rep 803, para 35. 261 See, eg, US-Croatia BIT, art I(d). 262 P-E Dupont, ‘The Arbitration of Disputes related to Foreign Investments affected by Unilateral Sanctions’, 202–203. 263 Viterbo, ‘Extraterritorial Sanctions and International Economic Law’, 172. 264 P-E Dupont, ’The Arbitration of Disputes related to Foreign Investments affected by Unilateral Sanctions’, 198–99. 265 Viterbo, ‘Extraterritorial Sanctions and International Economic Law’, 173. 266 Collins, An Introduction to International Investment Law, 292; P-E Dupont, ‘The Arbitration of Disputes related to Foreign Investments affected by Unilateral Sanctions’, 203; Viterbo, 54 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 law differentiates between actual ‘indirect expropriation’, on the one hand, and a state’s reasonable bona fide exercise of ‘police powers’ in matters such as the maintenance of public order, health, or morality, on the other.267 Thus, in Tecmed v Mexico, the tribunal asserted that ‘[t]he principle that the State’s exercise of its sovereign power within the framework of its police power may cause economic damage to those sub- ject to its powers as administrator without entitling them to any com- pensation whatsoever is undisputable’.268 The police powers doctrine has been applied in several cases to reject claims challenging regulatory measures designed specifically to protect public health.269 Could it also be used to justify asset freezes in the sanctions context? Interestingly, in Weinstein v Iran, Bank Melli Iran claimed that the attachment of its assets offended the Takings Clause of the Fifth Amendment to the US Constitution, as well as the expropriation clause in the 1955 Iran-US Treaty of Amity. While not expressly couching the attachment in terms of an exercise of ‘police powers’, the US Court of Appeals stressed that Bank Melli had been added to the OFAC list because of its ‘unlawful actions in support of terrorism’ and its conduct ‘as a funder of weapons of mass destruction’, as a result of which there could be no indirect ex- propriation in the sense of the Treaty of Amity.270 It remains to be seen whether this approach will be upheld in the Certain Iranian Assets case (pending before the ICJ at the time of writing). Even if the blocking of property of banks or companies of the primary sanctions target (in this case Iran) was to be regarded as a valid exercise of police powers,271 this would still leave room for arguing that a ‘secondary’ asset freeze against the banks or companies of other countries cannot normally constitute a bona fide exercise of this sovereign prerogative.272 In a similar vein, with respect to the other property and investment protection standards, there may be additional hurdles to overcome.273 For instance, the requirements of ‘legitimate expectations’ and ‘legal
‘Extraterritorial Sanctions and International Economic Law’, 172. Consider also, in the context of domestic courts’ power to issue provisional measures in the form of an asset freeze, B Demirkol, Judicial Acts and Investment Treaty Arbitration (CUP 2018) 230. 267 See further Philip Morris v Uruguay, ICSID Case No ARB/10/7 (Award, 8 July 2016) paras 290ff. 268 Tecnicas Medioambientales Tecmed SA v Mexico, ICSID Case No ARB(AF)/00/2 (Award, 29 May 2003) para 119. 269 Philip Morris v Uruguay, para 298. 270 Weinstein v Iran 609 F 3d 43 (2d Cir 2010) 54. 271 It is worth observing that the exercise of ‘police powers’ or the ‘right to regulate’ of states is often framed in terms of the protection of public welfare objectives relating to health, safety, and the environment. See, eg, annex 8-A, art 3 of the EU-Canada Comprehensive Economic and Trade Agreement (CETA) (signed 20 October 2016) [2017] OJ L11/23. 272 Even if a measure aims at protecting a legitimate public welfare objective, art 3 of CETA’s annex 8-A asserts that it should not be ‘manifestly excessive’. 273 Consider, eg, the award in Philip Morris v Uruguay, where the tribunal stresses with respect to the standard of ‘arbitrariness’ that states have a margin of appreciation and that what matters is whether there was a ‘manifest lack of reasons’ for the contested measure(s) (paras 390–400). Or, con- sider the high standard applied in respect of ‘denial of justice’, where the tribunal requires that there be ‘clear evidence of an outrageous failure of the domestic system’ (paras 498–500). SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 55 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 security’ do not in any way create an enforceable guarantee that a state will not introduce sanctions legislation that will adversely affect foreign companies/investors without proper compensation. As the tribunal stated in EDF v Romania, ‘[e]xcept where specific promises or represen- tations are made by the State to the investor, the latter may not rely on a [BIT] as a kind of insurance policy against the risk of any changes in the host State’s legal and economic framework’.274 Clearly, states do not commonly make commitments vis-a`-vis foreign investors that they will abstain from introducing economic sanctions. An exceptional—possibly unique—situation where states may have created ‘legitimate expecta- tions’ in the sanctions domain concerns the adoption of the JCPOA. Indeed, even if the JCPOA was and is not a legally binding instrument, it could be argued that the US withdrawal from the agreement—not- withstanding (initial) International Atomic Energy Agency confirma- tions of Iranian compliance275—contravened the legitimate expectations of foreign investors that the US would not unilaterally re-activate the full panoply of primary and secondary sanctions. In the section above dealing with the IMF Articles of Agreement, we already discussed how FCN treaties may also exclude the imposition of ‘exchange restrictions’, although such clauses tend to contain an in-built referral to the IMF regime. Interestingly, no such referral to the IMF rules is found in BIT clauses guaranteeing the free transfer of capital and returns (as found, for instance, in article VI of the US-Croatia BIT).276 The implication is that while the scope of these clauses is lim- ited to transfers relating to a ‘covered investment’, the mere notification of an asset freeze to the IMF will not prevent a breach of the clauses concerned.
274 EDF (Services) Limited v Romania, ICSID Case No ARB/05/13 (Award, 8 October 2009) para 219. In a similar vein, see Philip Morris v Uruguay, para 426. But for a more flexible interpret- ation, see Viterbo, ‘Extraterritorial Sanctions and International Economic Law’, 173: ‘Assuming that a Moroccan investor opened a US clothing company to manufacture T-shirts using exclusively Egyptian raw cotton and Egypt is subsequently targeted by US sanctions, the foreign investor may invoke the Morocco-United States BIT...’. 275 See the various ‘verification and monitoring’ reports issued by the IAEA Director-General, available at
277 See also P-E Dupont, ‘The Arbitration of Disputes related to Foreign Investments affected by Unilateral Sanctions’, 215 (concluding that ‘there exists a reasonable chance of success in an investor-State arbitration against a targeting State, for those foreign companies belonging to the tar- geted State in a position to rely on a BIT in force between their home country and the targeting State, based on the violation of some substantive standards of investment protection’). SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 57 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 Finally, even for those secondary restrictions that would prima facie seem contrary to treaty obligations, the question remains whether the sanctioning state (in this case, the US) could nonetheless rely on the ‘na- tional security’ exception to counter allegations of wrongful conduct. It is to this question that we turn next.
E. The security exception as an impenetrable line of defence for sanctioning states?
1. Security exceptions in bilateral investment treaties and friendship, commerce, and navigation treaties Assuming that secondary sanctions may entail violations of the WTO Agreements, and/or of various bilateral FCN treaties or BITs concluded between the US and EU Member States, it must be acknowledged that, at first sight, virtually all of these treaties278 contain a so-called ‘security exception’, or a broader clause listing so-called ‘non-precluded meas- ures’.279 The exact phrasing of these security exceptions differs from one treaty to another. On the one hand, some treaties reserve each party’s right to take measures ‘necessary to protect its security interests’. On the other hand, other treaties allow greater leeway and assert that nothing in the treaty shall preclude the application by either party of measures ‘which a party regards/considers as’ necessary to protect its es- sential security interests. The different language has obvious repercus- sions for the provisions’ relevance and application. ‘Security exceptions’ of the first type have been addressed on several occasions by the ICJ. Thus, the Court has made it clear that such clauses
278 As for the BITs referred to in note 150, see art X of the US-Bulgaria BIT; art XV of the US- Croatia BIT; art X of the US-Czech Republic BIT; art IX of the US-Estonia BIT; art IX of the US-Latvia BIT; art IX of the US-Lithuania BIT; art XII(3) of the US-Poland BIT; art X of the US-Romania BIT; and art X of the US-Slovakia BIT. As to the various FCN treaties mentioned under note 149, see art XXIV(e) of the US-Italy FCN Treaty (1948); art XXI(d) of the US- Denmark FCN Treaty (1948, 1951); art XX of the US-Ireland FCN Treaty (1950); art XXIII(d) of the Greece-US FCN Treaty (1951); art XXIV(d) of the US-Germany FCN Treaty (1954); art XXII(d) of the Netherlands-US FCN Treaty (1956); art XVI of the US-Belgium FCN Treaty; and art XIV(d) of the US-Luxembourg FCN Treaty (1962). Note that there appears to be one limited category of bilateral treaties concluded by the US with individual European countries that does not contain a security exception, viz the post-War Economic Cooperation Agreements. On the latter agreements, see Part IV.B.2.b. 279 Note that these clauses often list multiple ‘non-precluded measures’, eg, pertaining to fission- able materials, traffic in arms, protection of cultural heritage, implementation of UN sanctions, etc, in addition to clauses pertaining to measures ‘necessary’ to protect ‘essential security interests’. The present section, however, only focuses on the latter, more generic, security exception. For a brief discussion of the relevance of ‘NPM’ clauses in the sanctions context, see P-E Dupont, ‘The Arbitration of Disputes related to Foreign Investments affected by Unilateral Sanctions’, 212–13. Note that Dupont also observes that grounds precluding wrongfulness, such as force majeure or ne- cessity cannot normally be invoked to justify the adoption of unilateral sanctions (ibid 207–208). On the possible reliance on countermeasures in connection with secondary sanctions, see notes 321–22 and accompanying text. On the role of ‘denial of benefits’ clauses, see: Viterbo, ‘Extraterritorial Sanctions and International Economic Law’, 74. 58 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 do not restrict the Court’s jurisdiction, but instead serve as an affirma- tive defence on the merits.280 In Nicaragua, it was held that, in order to justify certain measures under the ‘security exception’ of the 1956 US- Nicaragua FCN treaty, it was not sufficient for these measures to be taken with a view to protecting the essential security interests of the state concerned; rather the measures should additionally be ‘“necessary” for that purpose; and whether a given measure is “necessary” is not purely a question for the subjective judgment of the party ... and may thus be assessed by the Court’.281 A similar approach was adopted in Oil Platforms. In that case, Iran was prepared to recognize some of the inter- ests referred to by the US—viz the safety of US vessels and crew, and the uninterrupted flow of maritime commerce in the Persian Gulf dur- ing the Iran-Iraq war—as being reasonable security interests of the US in the sense of article XX(1)(d) of the 1955 Iran-US Treaty of Amity. By contrast, it denied that the contested US military action against Iranian oil platforms could be regarded as ‘necessary’ to protect those interests.282 Interpreting ‘necessity’ by reference to the necessity and proportionality criteria for the exercise of the right of self-defence, and finding the parameters for a lawful exercise of self-defence not to be ful- filled, the Court eventually agreed.283 Finally, the scope of the security exception is also at the heart of the proceedings brought by Iran against the US on the basis of the compromissory clause in the 1955 Treaty of Amity, which concerns the re-activation of US sanctions following the withdrawal of the US from the JCPOA. While the case remains to be decided at the time of writing, the Court has already briefly touched upon the impact of the ‘security exception’ in the Treaty of Amity in its unanimous order on provisional measures when dealing with the plausi- bility of the rights asserted by Iran under the Treaty. In particular, the Court accepted that the application of article XX(1)(d)284 ‘might affect at least some of the rights invoked by Iran under the Treaty of Amity’.285 By contrast, the Court was of the view that ‘Iran’s rights relating to the importation and purchase of goods required for humani- tarian needs, and to the safety of civil aviation, cannot plausibly be con- sidered to give rise to the invocation of [article XX(1)(d)]’.286 For this reason, the Court ordered the US to lift sanctions relating to
280 Case Concerning Oil Platforms (Islamic Republic of Iran v United States) (Preliminary Objection) [1996] ICJ Rep 803, para 20. 281 Nicaragua, para 282. The Court stresses that the relevant treaty provision did not refer to what the party ‘considers necessary’ to protect its security interests. It follows a contrario that if such language is used, there is more room for ‘subjective judgment’ by the party invoking the clause. 282 Case Concerning Oil Platforms (Islamic Republic of Iran v United States) (Merits) [2003] ICJ Rep 161, para 73. 283 ibid, para 78. 284 As well as art XX(1)(b) of the Treaty, which deals with ‘fissionable materials’ and which was also invoked by the US. 285 Alleged Violations of the 1955 Treaty of Amity (Provisional Measures) para 68. 286 ibid, para 69. SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 59 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 the importation and purchase of goods required for humanitarian needs, such as (i) medicines and medical devices; and (ii) foodstuffs and agricultural com- modities; as well as goods and services required for the safety of civil avi- ation, such as (iii) spare parts, equipment and associated services ... necessary for civil aircraft.287 An illustration of a security exception of the second type can be found in article 99(1)(d) of the EU-Russia Partnership Agreement, which was addressed by Court of Justice of the EU in the Rosneft case.288 The Court examined, in particular, whether the clause could be invoked vis- a`-vis the EU’s ‘restrictive measures’ adopted after the Russian military intervention in Crimea in 2014. Answering in the affirmative, the Court first noted that the provision’s reference to ‘serious international tension constituting a threat of war’ does not refer to a war directly affecting the territory of the EU.289 Accordingly, it accepts that the events in Ukraine since 2014 are capable of justifying measures to protect EU security interests. Second, in respect of the question of whether the measures adopted were indeed ‘necessary’ for the protection of these essential se- curity interests, the Court adopts a deferential approach. It merely acknowledges the ‘broad discretion’ of the Council of the EU in areas involving complex political, economic, and social choices, and accepts that the Council ‘could take the view’ that the measures taken were ne- cessary for the protection of essential EU security interests and for the maintenance of international peace and security.290 While the Court was ultimately applying EU law, the Rosneft judg- ment provides support for the view that security exception clauses of the second type leave considerably less room for judicial review. Three observations are nonetheless in order. First, case law confirms that the phrase ‘if it considers’ does not give absolute discretion to the party invoking it, as reliance on such language remains subject to the obliga- tion of good faith.291 Second, case law confirms that ‘when States intend to create for themselves a right to determine unilaterally the legitimacy of extraordinary measures importing non-compliance with obligations assumed in a treaty, they do so expressly’.292 Third, it appears that many of the FCN treaties and BITs concluded between the US and
287 ibid, para 70. 288 Case C-72/15 Rosneft v Her Majesty’s Treasury et al EU:C:2017:236, para 108ff. The relevant clause provides that ‘[n]othing in this Agreement shall prevent a Party from taking any measures (1) which it considers necessary for the protection of its essential security interests: ...(d) in the event of serious internal disturbances affecting the maintenance of law and order, in time of war or serious international tension constituting threat of war or in order to carry out obligations it has accepted for the purpose of maintaining peace and international security’ (our emphasis). 289 ibid, para 112. 290 ibid, paras 113–16. 291 See, eg, Certain Questions of Mutual Assistance in Criminal Matters (Djibouti v France) (Judgment) [2008] ICJ Rep 177, para 145. 292 CMS Gas Transmission Company v Argentina, ICSID Case No ARB/01/8 (Award, 12 May 2005) para 370; Enron Corporation Ponderosa Assets LP v Argentina, ICSID Case No ARB/01/3 (Award, 22 May 2007) para 335. 60 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 individual European countries contain security clauses of the first type. This is true, for example, of the US-Belgium FCN Treaty and the US- Croatia BIT.293 Invocation of these clauses is thus subject to judicial review.
2. Security exceptions in the WTO Agreements Security exceptions can also be found in the WTO Agreements (in add- ition to the lists of ‘general exceptions’ relating, eg, to the protection of ‘public morals’ or health protection294). Relevant clauses include article XXI GATT, article XIVbis GATS, article 73 of the Agreement on Trade-Related Aspects of Intellectual Property Rights, and article III(1) of the revised GPA. Most well-known is article XXI(b) GATT, which provides that nothing in the GATT shall be construed (b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests (i) relating to fissionable materials or the materials from which they are derived; (ii) relating to the traffic in arms; ... (iii) taken in the time of war or other emergency in international relations; ... The question of whether article XXI GATT is ‘self-judging’ or not has received ample attention in legal scholarship.295 This question has become all the more relevant in recent years, as the security exception has been increasingly invoked with a view to justifying trade restrictions at odds with the WTO rules, eg, in the context of the ongoing US-China trade conflict.296 Until recently, however, the scope of the exception had never directly been addressed by the WTO Dispute Settlement Body.297
293 See, eg, US-Belgium FCN Treaty, art 16(e); US-Croatia BIT, art XV. 294 See in particular art XX GATT; art XIV GATS. 295 Alford, ‘The Self-Judging WTO Security Exception’; D Akande and S Williams, ‘International Adjudication on National Security Issues: What Role for the WTO’ (2002) 43 Virginia Journal of International Law 365; OQ Swaak-Goldman, ‘Who Defines Members’ Security Interest in the WTO?’ (1996) 9 LJIL 361; MJ Hahn, ‘Vital Interests and the Law of GATT: An Analysis of GATT’s Security Exception’ (1990) 12 Michigan Journal of International Law 558; WJ Moon, ‘Essential Security Interests in International Investment Agreements’ (2012) 15 Journal of International Economic Law 481; R Dattu and J Boscariol, ‘GATT Article XXI, Helms-Burton and the Continuing Abuse of the National Security Exception’ (1997) 28 Canadian Business Law Journal 198; S Kitharidis, ‘The Unknown Territories of the National Security Exception: The Importance and Interpretation of Art XXI of the GATT’ (2014) 21 Australian International Law Journal 79. 296 See, eg, ‘A Timeline of the U.S.-China Trade War’ Bloomberg (14 May 2019)
298 Russia – Measures Concerning Traffic in Transit, WT/DS512/R. See further T Voon, ‘Russia – Measures concerning Traffic in Transit’ (2020) 114 AJIL 96. 299 Russia – Measures Concerning Traffic in Transit, WT/DS512/R, paras 7.51–52. 300 ibid, para 7.82. 301 ibid, para 7.77. 302 ibid, para 7.75. 303 ibid, para 7.76. 304 ibid, paras 7.111–25. Note that the panel drew attention, among other things, to the fact that the situation was recognized by the UNGA as involving an armed conflict. The panel found further evidence of the ‘gravity’ of the situation in the fact that several countries had imposed sanctions against Russia in connection with the situation (albeit that this latter argument appears to put the cart before the horse). 305 ibid, paras 7.131 and 7.146. The panel does note that ‘essential security interests’ is ‘evidently a narrower concept than “security interests”’ and ‘may generally be understood to refer to those interests relating to the quintessential functions of the state, namely, the protection of its territory and its population from external threats, and the maintenance of law and public order internally’: ibid, para 7.130. 62 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 invoke alleged ‘security interests’ to engage in mere protectionist trade measures.306 For this reason, members must ‘articulate the essential se- curity interests ...sufficiently enough to demonstrate their veracity.’307 Last but not least, the panel added—rather cursorily—that the obliga- tion of good faith applies equally to the ‘connection’ between the essen- tial security interests and the measures at issue. Specifically, the measures ought to ‘meet a minimum requirement of plausibility in rela- tion to the proffered essential security interests’. Put differently, they should not be ‘implausible as measures protective of these interests’.308 The panel thus envisaged a marginal review to verify whether ‘measures are so remote from, or unrelated to, [the emergency] that it is implaus- ible that [they were implemented] for the protection of [the member’s] essential security interests arising out of the emergency’.309
3. Implications in the secondary sanctions context What can be derived from the foregoing? First, the panel report in Russia – Measures Concerning Traffic in Transit suggests that if the EU were to contest the legality of certain US secondary sanctions at the WTO level, the first question to arise would be whether one or more of the three circumstances listed in article XXI(b) GATT (or article XIVbis(b) GATS) is present. In the case of the US sanctions against Iran, a plausible argument could be developed—having regard to inter- national tensions over Iran’s nuclear programme or its support for ter- rorist groups—that these sanctions are indeed ‘taken in time of an international emergency’ for the sake of this provision.310 It is highly doubtful a WTO panel would be inclined to challenge such an interpret- ation. As far as sanctions against Cuba are concerned, this seems much less obvious, especially when one considers the origins of the Helms- Burton Act.311 The onus would arguably be on the US to explain why its relationship with Cuba is, and remains, more than a matter of ‘polit- ical or economic differences’ between the respective countries (to para- phrase the panel report in Russia – Measures Concerning Traffic in
306 Note that this was also the position defended by the EU: ibid, para 7.43. 307 ibid, para 7.134. When the alleged security interests are further removed from the inter- national emergency, a member ‘would need to articulate its essential security interests with greater specificity’: ibid para. 7.135. In casu, the panel concluded that Russia’s articulation of its essential se- curity interests was ‘minimally satisfactory’: ibid, para 7.137. 308 ibid, para 7.138. 309 ibid, para 7.139. 310 In parallel, it could be argued that the sanctions are related to ‘fissionable materials’ in the sense of art XXI(b)(i) GATT (as the US has claimed: see note 284). 311 Pro memorie, the Helms-Burton Act was adopted in 1996 in response to the shooting by the Cuban air force of two civilian aircraft, resulting in the killing of three US citizens and a US resi- dent. According to Viterbo, the concept of ‘emergency in international relations’, as interpreted by the panel, ‘prevents WTO members from indiscriminately qualifying any conceivable security threat as an emergency’. With regard to the Helms-Burton Act, she finds it ‘disputable that such emergency still exists today or that, after more than two decades, it requires urgent action’. See Viterbo, ‘Extraterritorial Sanctions and International Economic Law’, 169. SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 63 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 Transit).312 It is uncertain to what extent human rights violations in the territory of another WTO member might amount to an international emergency in the sense of article XXI(b)(iii). The regrettable reality is that a considerable number of WTO members have a poor human rights record. This sobering fact might counsel against an overly broad inter- pretation of the notion of ‘international emergency’ to avoid excessive use (or abuse) of the security exception. Second, as to the ‘necessity’ of the sanctions adopted, both the WTO panel report and the ICJ case law suggest that there ought to be at least a plausible link between the sanctions adopted and the security interests they seek to protect, in that the sanctions ought to be reasonably capable of fostering the interests concerned and should not be purely punitive in nature. Interestingly, the underlying message of the ICJ’s order on pro- visional measures in Alleged Violations of the 1955 Treaty of Amity— while not made explicit—appears to be that embargoes targeting certain goods, including ‘foodstuffs and agricultural commodities’, can never meet this test. This finding carries potentially far-reaching implications, eg, for the US embargo on Cuban sugar, or the Russian ban on the im- portation of certain foodstuffs from the EU.313 The case law of the ICJ would also appear to require more than mere ‘plausibility’ and could, in fact, be read as hinting at a requirement not to go beyond what is neces- sary to meet the security interests at stake; in other words, as an obliga- tion to use the less harmful alternative. Whether a stricter or more lenient ‘necessity’ standard is adopted evidently has major implications. For instance, for those US sanctions that are justified by reference to the threat of nuclear proliferation, a strict reading of the necessity require- ment might entail that trade restrictions should primarily be limited to goods, equipment, and technology that can contribute to the prolifer- ation of weapons of mass destruction, as opposed to goods that manifest- ly pose no such risk. Yet, by the same token, one may wonder whether the EU’s restrictive measures adopted as a result of Russia’s intervention in Crimea, and which include restrictions on the export of goods and equipment for Russia’s energy sector,314 would meet the test.315 The outcome of the proceedings before the ICJ in Alleged Violations of the 1955 Treaty of Amity may shed further light on the required link be- tween the sanctions adopted and the security interests claimed by the
312 Russia – Measures Concerning Traffic in Transit, WT/DS512/R, para 7.75. 313 On the Russian import ban on EU products, see European Commission, ‘Russian Import Ban on EU Products’
316 See the WTO proceedings referred to in note 154. Reference can also be made to the numer- ous disputes relating to the US imposition of tariffs on steel and aluminium imports, under s 232 of the Trade Expansion Act of 1962, Pub L No 87-794 (1962). See, for instance, United States – Certain Measures on Steel and Aluminium Products, Request for the Establishment of a Panel by Norway, WT/DS552/10 (19 October 2018). 317 Russia – Measures Concerning Traffic in Transit, Third-Party Written Submission by the European Union (8 November 2017)
V. JUDICIAL CHALLENGES TO THE WIDE REACH OF US SECONDARY SANCTIONS
Having examined the compatibility of secondary sanctions with the law of jurisdiction and with various treaty instruments, this section explores how affected third parties might challenge their legality under these rules in the context of judicial proceedings. Section A first examines the potential for judicial challenges before US courts. Section B subse- quently explores the various options to trigger contentious proceedings at the international level, while also tackling the possibility of advisory proceedings before the ICJ. Indirect judicial challenges of US secondary sanctions before EU-based courts under the EU Blocking Statute will be addressed in Part VI.
319 International Law Commission, Articles on the Responsibility of States for Internationally Wrongful Acts (ARSIWA) (2001) II(2) Yearbook of the International Law Commission 26, art 51: ‘Countermeasures must be commensurate with the injury suffered’. 320 ibid, art 49(1). 321 International Law Commission, Articles on the Responsibility of States for Internationally Wrongful Acts (ARSIWA) with Commentaries Thereto (2001) II(2) Yearbook of the International Law Commission 30, 130(4). 322 That is, even if one were to accept the legality of third-party countermeasures, which none- theless remains the subject of debate. See further, eg, M Dawidowicz, Third-Party Countermeasures in International Law (CUP 2017). 323 See further, T Ruys, ‘Armed Attack’ and Article 51 of the UN Charter (CUP 2010) 108–10. 66 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 A. Judicial challenges before US courts Some authors have identified US courts as a promising route to chal- lenge extraterritorial US sanctions.324 According to Lohmann, for in- stance, European policy-makers ought to systematically encourage and assist EU-based companies to challenge the extraterritorial reach of US sanctions in US courts.325 At the outset, a distinction should be drawn between challenges based on US conventional obligations, on the one hand, and potential breaches of customary law on the other. With regard to the first scenario, two im- portant hurdles can be identified for potential claimants. First, as is well-known, while treaties are considered part of the supreme law of the land under the US Constitution, they are not always enforceable in US courts.326 Specifically, enforceability is limited to those treaty provisions that are self-executing in nature. Several of the instruments discussed above in Part IV do not meet this test. In particular, it is settled practice in US case law that no private or other person, other than the US, has standing within a US court to invoke a provision of a WTO Agreement to challenge actions of the federal government or its agencies.327 The situation would seem to be different in respect of, for instance, FCN treaties, which have routinely been assumed to be self-executing.328 At the same time, even for those treaty provisions that are self-executing, the fact remains that, in accordance with the last-in-time rule, a later do- mestic statute will override conflicting provisions in an earlier treaty.329 Thus in Weinstein v Iran, which concerned US sanctions against Bank Melli Iran, the US District Court of New York held that ‘to the extent that [Terrorism Risk Insurance Act (TRIA)] § 201(a) may conflict with Article III(1) of the [Iran-US] Treaty of Amity’, the TRIA would ‘trump’ the Treaty of Amity.330 Would a challenge before a US domestic court based on the custom- ary rules of jurisdiction fare any better? Suggestions to ‘take the fight’ to the US judiciary are inspired by two important tenets of US
324 The authors would like to thank Ashley Deeks for providing helpful input. All errors remain our own. 325 Lohmann, ‘Extraterritorial U.S. Sanctions: Only Domestic Courts Could Effectively Curb the Enforcement of U.S. Law Abroad’, 7–8. 326 See further CA Bradley, International Law and the U.S. Legal System (2nd edn, OUP 2015) 41. 327 This is explicitly asserted in the Uruguay Round Agreements Act, Pub L No 103-465 (1994). See further JC Barcelo´ III, ‘The Status of WTO Rules in U.S. Law’ (2006) Cornell Law School Research Paper 06-004, 3–5
331 Murray v The Charming Betsy 6 US 64 (1804). See further Bradley, International Law and the U.S. Legal System, 15–18. 332 Morrison v National Australia Bank, 6. In the wake of the Morrison decision, some have even suggested that US extraterritorial legislation was becoming a ‘paper tiger’: see SB Burbank, ‘International Civil Litigation in U.S. Courts: Becoming a Paper Tiger?’ (2012) 33 University of Pennsylvania Journal of International Law 663. The presumption has been applied in numerous cases: see Bradley, International Law and the U.S. Legal System, 179–86; Morrison v National Australia Bank, 24; United States v Vilar 729 F 3d 62 (2d Cir 2013) 98; Kiobel v Royal Dutch Petroleum Co 569 US 108 (2013) 14; RJR Nabisco v European Community 195 L Ed 2d 476 (2016). 333 Note that the present analysis is not concerned with cases where persons or entities subject to financial sanctions have sought to challenge these sanctions on the basis of due process grounds, nor is it concerned with cases where such persons or entities have challenged the constitutionality of US sanctions. See further R Gordon, M Smyth, and T Cornell, Sanctions Law (Hart 2019) chapter 9 (‘challenging sanctions in the US’). 334 S Emmenegger and T Do¨beli, ‘Extraterritorial Application of U.S. Sanctions Law’ in A Bonomi and K Nadakavukaren Schefer (eds), US Litigation Today: Still a Threat for European Businesses or Just a Paper Tiger? (Schulthess Verlag 2018) 245. 335 United States v Reza Zarrab. 336 Parts II.B.3 and II.B.5. 337 See the cases cited in the following footnote. 338 By way of comparison, in United States v Ehsan 163 F 3d 855 (4th Cir 1998), the Court looked into the alleged ‘ambiguity’ of the export limitations in Executive Order No 12,959 and its imple- menting regulations, eventually rejecting the allegation. In United States v Homa International Trading Corp 387 F 3d 144 (2d Cir 2004) and United States v Banki 685 F 3d 99 (2d Cir 2011), the courts affirmed that the term ‘service’ in Executive Order No 12,959 extended to ‘the provision of money transfers’ (Homa), even if the transfer of funds on behalf of another was ‘not performed for a fee’ (Banki). Neither of these cases tackled questions of extraterritoriality: Homa International 68 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 correspondent account jurisdiction as a stand-alone jurisdictional basis.339 Because of its uniqueness, it warrants a somewhat longer dis- cussion, albeit one focused on the application (or non-application) of the presumption against extraterritoriality. The case involved a Turkish-Iranian businessman who was at the centre of a scheme to ship Iranian gas to Turkey in exchange for Turkish Lira, which was exchanged into gold before reaching Iran.340 Crucially, the scheme involved a series of dollar transactions between non-US persons and entities that were routed through US correspond- ent bank accounts. In March 2016, Reza Zarrab was arrested when trav- elling to Florida on a family holiday. He was charged with several crimes, including, most notably, conspiracy to violate the IEEPA and the ITSR. Interestingly, Zarrab sought to have the motion against him dismissed as a form of ‘prosecutorial overreach of the first order’.341 In particular, in spite of the presumption against extraterritoriality, he noted that he stood ‘accused of violating U.S. law for agreeing with for- eign persons in foreign countries to direct foreign banks to send funds transfers from foreign companies to other foreign banks for foreign com- panies’. Zarrab therefore argued that the US Government had ‘manu- factured’ charges against him ‘out of the incidental involvement of a U.S. bank at some mid-point in the payment chain of a transaction that originated from a foreign country and occurred between two foreign entities’.342 Ultimately, however, Zarrab illustrates the limits to challenging US sanctions on grounds of jurisdictional overreach. First, by applying a broad understanding of territoriality, US domestic courts can in many cases avoid dealing with the presumption against extraterritoriality. In particular, significant case law exists asserting that the deliberate (and recurrent) movement of dollars through US bank accounts (including correspondent banks) creates a sufficient nexus with the US to exercise jurisdiction, and that the exercise of personal jurisdiction on such a basis does not offend due process protection under the US Constitution.343 Specifically, in the context of US economic sanctions, earlier cases con- firmed that the execution of a money transfer by a US person originating
Trading Corp was a Manhattan business, whereas Mahmoud Reza Banki was a naturalized US citi- zen living in the US. 339 Emmenegger and Do¨beli, ‘Extraterritorial Application of U.S. Sanctions Law’, 245. 340 See further ibid 232. 341 United States v Reza Zarrab,3. 342 ibid. Similar questions of jurisdiction were also raised in the related case of United States v Mehmet Hakan Atilla involving a Turkish banker at Halkbank who allegedly had been involved in Reza Zarrab’s ‘gold for gas’ scheme: see United States v Mehmet Hakan Atilla 15 Cr 867 (RMB) (SDNY, 7 February 2018) (Decision and Order). 343 See, eg, with respect to 18 USC § 371 (conspiracy to defraud the US): United States v Budovsky 2015 WL 5602853 (SDNY 2015); United States v Yousef 327 F 3d 56 (2d Cir 2003); in re- lation to the Anti-Terrorism Act: Licci v Lebanese Canadian Bank SAL 2016 WL 4470977 (2d Cir 2016). On the due process test for the exercise of personal jurisdiction, see also: Securities and Exchange Commission v Straub. SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 69 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 from a US bank account entails the ‘exportation’ of a ‘service’ in the sense of the IEEPA and ITSR, regardless of whether this service is pro- vided for a fee or not.344 Zarrab establishes that the same is true for the mere clearing of payments through a US correspondent account. Zarrab’s contention that ‘the mere fact that a U.S. bank cleared a pay- ment originating and terminating at foreign banks without any involvement of Zarrab ... does not somehow transform the payment into a “U.S. export” by Zarrab’ was ultimately dismissed as unpersuasive.345 Second, US case law indicates that the presumption against extra- territoriality does not apply ‘where the law at issue is aimed at protect- ing the right of the government to defend itself’.346 This is of particular relevance in the sanctions context, inasmuch as economic sanctions are used to confront threats to the national security, foreign policy, or economy of the US.347 By way of illustration, in Zarrab, the Court held that, even assuming, arguendo, that the issue of extraterri- toriality were to be relevant, the presumption of extraterritoriality would be overcome by the US’s interest in defending itself.348 In par- ticular, the Court noted how the enactment and promulgation of the IEEPA and the ITSR reflected the US’s interest in protecting and defending itself, among other things, against ‘Iran’s sponsorship of international terrorism, Iran’s frustration of the Middle East peace process, and Iran’s pursuit of weapons of mass destruction’.349 Whether such security-based arguments would pass the jurisdictional test under the customary international law of jurisdiction, or the test under the security exception of various international agreements, such as the GATT, is a different matter altogether.350 Third, the presumption against extraterritoriality is irrelevant where it is clear, having regard to the context of a statutory provision as well as its text, that Congress intended the legislation concerned to apply extraterritorially.351 Fourth, and on a related note, where relevant sanctions instruments expressly provide for their extraterritorial application, contrary rules of
344 See, eg, United States v Homa; United States v Banki. 345 United States v Reza Zarrab, 15–17. 346 United States v Bowman 260 US 94 (1922) 98. Applying this reasoning, see, eg, United States v Vilar; United States v Reza Zarrab,5. 347 50 USC § 1701(a): ‘Any authority granted to the President by section 1702 of this title may be exercised to deal with any unusual or extraordinary threat, which has its sources in whole or sub- stantial part outside the United States, to the national security, foreign policy, or economy of the United States’. 348 United States v Reza Zarrab, 18. 349 ibid 19. 350 See Part III.F. 351 See further Bradley, International Law and the U.S. Legal System, 179–86. 70 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 customary international law cannot be invoked to curtail their reach. In accordance with the US Supreme Court’s Paquete Habana case, US courts will uphold a Congressional statute that Congress clearly intended to apply extraterritorially even if it violates customary inter- national law.352 The same holds true if an Executive Order were to be in tension with customary international law.353 It follows from the foregoing that the presumption against extraterri- toriality is of no avail to contest the explicit extension of the personal scope of application of certain sanctions to ‘foreign financial institutions’ (eg, section 2 of Executive Order 13846 concerning transactions with Iran) or to ‘entities owned or controlled by a United States person and established or maintained outside the United States’ (eg, section 8 of Executive Order 13846).354 By the same token, the presumption against extraterritoriality would be of no avail where sanctions instruments otherwise contain clear indi- cations of their envisaged extraterritorial scope. Title III of the Helms- Burton Act, for instance, which seeks to provide US nationals with a ju- dicial remedy to claim damages from any person who ‘traffics’ in prop- erty which was confiscated by the Cuban Government, leaves no doubt as to its extraterritorial scope.355 In order to remove any lingering doubt as to Congress’s intent, the Act expressly claims, in section 301(10), that ‘[i]nternational law recognizes that a nation has the ability to provide for rules of law with respect to conduct outside its territory that has or is intended to have substantial effect within its territory’.356 In the end, the above considerations suggest that recourse to the US judicial system is unlikely to result in a major overhaul of US secondary
352 The Paquete Habana 175 US 677 (1900). See also Bradley, International Law and the U.S. Legal System, 187–88: ‘[I]t is well settled that, when there is a clear conflict between a federal statute and customary international law, U.S. courts will apply the statute. This means that, as a matter of U.S. law, Congress can exceed the limitations on prescriptive jurisdiction described above’. On the role of customary international law in the US legal order, see further ibid 139–67. 353 Bradley, International Law and the U.S. Legal System, 139–67. For an illustration, see Garcia-Mir v Meese 788 F 2d 1446 (11th Cir 1986). 354 At times, the extension of the personal scope of application is implicit, notably when a single sanctions instrument contains both restrictions that apply to ‘United States persons’ only, as well as restrictions that apply to any ‘person’, the underlying idea being that the latter term covers third- state nationals and companies. See, eg, the simultaneous use of ‘a person’ and a ‘United States per- son’ in ‘Reimposing Certain Sanctions with Respect to Iran’, Exec Order No 13,846, or in the Iran Sanctions Act of 1996. 355 Abundant evidence to this end can be gleaned, inter alia, from the definition of the terms ‘per- son’ (see, eg, s 4(11) of the Act that defines ‘person’ as ‘any person or entity, including any agency or instrumentality of a foreign state’), the expressed concern that the Cuban Government is seeking to attract ‘foreign investors’ (s 301(5)) and that the ‘transfer to third parties of properties confiscated by the Cuban Government’ would complicate their return to the original owners (s 301(7)), or the declared aim to ‘deter’ trafficking in wrongfully confiscated property (s 301(11)). 356 Numerous other restrictions similarly leave little doubt as to their extraterritorial scope. For instance, s 5(7) of the Iran Sanctions Act of 1996 foresees the possibility of menu-based sanctions in respect of any person that ‘owns, operates, or controls, or insures, a vessel that ...was used to trans- port crude oil from Iran to another country’. Or consider § 560.205 of the ITSR which effectively ‘prohibits’ ‘the re-exportation from a third country’ to Iran ‘by a person other than a United States person, of any goods, technology, or services’ exported from the US under certain conditions. SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 71 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 sanctions. Apart from the fact that several secondary sanctions would not seem to contravene customary international law in the first place (see Part III.A), invoking the presumption against extraterritoriality or the Charming Betsy doctrine will not produce the desired results where the extraterritorial scope of the relevant sanctions is clear from the sanc- tions instruments themselves. Even in a hypothetical case where a per- son successfully invokes the presumption against extraterritoriality or the Charming Betsy doctrine before a US court to limit the scope of ap- plication of a secondary sanctions instrument, nothing would prevent the legislative or executive branch from amending the instrument so as to expressly reaffirm a broad extraterritorial scope in response. That is not to say that raising jurisdictional challenges in litigation be- fore US courts is simply meaningless. Indeed, there have only been a few cases so far where extraterritoriality was tackled in the sanctions con- text.357 Thus, the extraterritorial application of several sanctions instru- ments remains untested before the domestic courts.358 Importantly, the US Supreme Court itself has yet to directly address correspondent ac- count jurisdiction, including on the question of whether so-called ‘U- Turn transactions’ may indeed entail an ‘exportation of services’ in the sense of section 560.204 of the ITSR359 and other sanctions instruments. A hopeful sign can be found in the 2018 Jesner v Arab Bank judgment of the US Supreme Court.360 In this case, the Court dealt with a petition against a Jordanian bank under the Alien Tort Statute (ATS) based on claims that the bank had used its New York branch to clear dollar- dominated transactions that benefited terrorists through the Clearing House Interbank Payments System (CHIPS). According to Justice Kennedy, writing for the majority, ‘[i]t could be argued ... that ... the activities of the defendant corporation and the alleged actions of its employees have insufficient connections to the United States to subject it to jurisdiction under the ATS’.361 Elsewhere, pointing inter alia to the significant diplomatic tension with Jordan resulting from the case, Justice Kennedy held that ‘[a]t a minimum, the relatively minor connection
357 In United States v Reza Zarrab, the matter was not further pursued as Zarrab pleaded guilty and testified as a government witness: B Weiser, ‘Reza Zarrab, Turk at Center of Iran Sanctions Case, Is Helping Prosecution’ The New York Times (28 November 2017)
B. Judicial challenges at the international level
1. International dispute settlement on the basis of the WTO Agreements, friendship, commerce, and navigation treaties, or bilateral investment treaties In Part IV, it was suggested that specific secondary sanctions may vio- late a range of multilateral or bilateral treaties to which the US is a party. Some of these instruments, however, do not provide for a judicial rem- edy or other enforcement mechanism. Under article XXVI(2) of the IMF Articles of Agreement, for instance, if a member fails to fulfil its obligations under the Agreement it can be declared ineligible to use the general resources of the Fund. In case of persistent failure, the voting rights of a member can be suspended by a 70% majority of the total vot- ing power, and can ultimately be required to withdraw by a majority of 85% of the total voting power.364 However, no binding dispute settle- ment mechanism is provided for. That said, at least some US secondary sanctions sit uneasily with a variety of treaties that do provide for some form of judicial dispute
362 ibid 25–26. 363 Lohmann, ‘Extraterritorial U.S. Sanctions: Only Domestic Courts Could Effectively Curb the Enforcement of U.S. Law Abroad’, 8. But see Geranmayeh and Lafont Rapnouil, ‘Meeting the Challenge of Secondary Sanctions’, 65: ‘While no case has been brought before the US Supreme Court, several legal experts believe it highly likely to favour executive discretion on sanctions policy’. 364 Given the pivotal role of the US within the IMF, as well as its voting power (16.52% as of May 2019: see IMF, ‘IMF Members’ Quotas and Voting Power, and IMF Board of Governors’
365 See note 149. 366 See, eg, US-Belgium FCN Treaty, art 19. 367 See the overviews of BITs in note 150. 368 See, eg, US-Croatia BIT, art XI. 369 See, eg, ibid, art X. 370 See further, WTO Secretariat, A Handbook on the WTO Dispute Settlement System (CUP 2017). 371 European Communities – Regime for the Importation, Sale and Distribution of Bananas, WT/ DS27/AB/R, para 132. 372 See WTO, ‘Legal Issues Arising in WTO Dispute Settlement Proceedings’
376 Note that no such possibility exists when the primary target has not joined the WTO (as is the case for Iran). 377 See, eg, European Communities – Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, para 137. See also the EC’s request for the establishment of a panel to examine the Helms-Burton Act (United States – The Cuban Liberty and Democratic Solidarity Act, WT/ DS38/2), which also identifies several non-violation complaints (points (vi), (vii) and (viii)). 378 See further G Cook, ‘Non-Violation Complaints: Dispute Settlement at the World Trade Organization (WTO)’, Max Planck Encyclopaedia of International Procedural Law Online (last updated October 2018). 379 ibid, paras 45ff (Cook also suggests that a non-violation complaint might be more likely to succeed ‘where there is a close nexus between the timing, product/sectoral coverage, and effect of the challenged measure and market access commitment at issue’ (para 51), which might be less obvi- ous in respect of secondary sanctions); Y Tanaka, The Peaceful Settlement of international Disputes (CUP 2018) 283. 380 As for the ICJ, reference can be made to the Certain Iranian Assets (Iran v United States)
382 United States – The Cuban Liberty and Democratic Solidarity Act, WT/DS38/5 and WT/ DS38/6. 383 See notes 227–30 and accompanying text. 384 As an active ‘sanctions sender’, the EU itself, for instance, could be said to have an interest in not undermining the possible reliance on the ‘security exception’ (as illustrated, for instance, by the CJEU’s Rosneft judgment – see note 288 and accompanying text). At the same time, in its third- party written submission in the Russia – Measures Concerning Traffic in Transit case, the EU clearly argued against the position that the GATT’s security exception is self-judging in nature. 385 Russia – Measures Concerning Traffic in Transit, WT/DS512/R. 386 As the US did following the ICJ’s order of provisional measures in Alleged Violations of the 1955 Treaty of Amity: see, eg, ‘US terminates 1955 “Treaty of Amity” with Iran’ DW (4 October 2018)
388 Viterbo, ‘Extraterritorial Sanctions and International Economic Law’, 166. 389 See, eg, E-U Petersman, ‘How Should WTO Members React to Their WTO Crises?’ (2019) World Trade Review 1; R McDougall, ‘The Crisis in WTO Dispute Settlement: Fixing Birth Defects to Restore Balance’ (2018) 52 Journal of World Trade 867; J Hillman, ‘Three Approaches to Fixing the World Trade Organization’s Appellate Body: The Good, the Bad and the Ugly?’ (Institute of International Economic Law, December 2018)
2. Circumventing the security exception: What alternatives? a. The advisory jurisdiction of the International Court of Justice As a matter of principle, one option to challenge secondary sanctions while circumventing conventional ‘security exceptions’ is to have the UN General Assembly request an advisory opinion from the ICJ pursu- ant to article 96 of the UN Charter and article 65 of the ICJ Statute.392 An important advantage of challenging the legality of secondary sanc- tions through an advisory procedure is that the underlying legal questions
392 Practice confirms that a simple majority suffices to adopt a UNGA resolution requesting an ad- visory opinion. See further P d’Argent, ‘Article 65’ in A Zimmerman and others (eds), The Statute of the International Court of Justice: A Commentary (3rd edn, OUP 2019) 1789–90. Note that advisory opin- ions may also be sought by the UN Security Council. This hypothesis does not seem relevant here, inas- much as the US could of course use its veto power to block such a request. A request from a specialized agency of the UN also seems unlikely, as such agencies can only ask legal questions ‘arising within the scope of their activities’ (art 96(2) of the UN Charter). See also Perben and others, ‘The American Withdrawal from the Vienna Agreement on the Iran Nuclear Programme’. Note that while in theory the Court has discretion whether or not to respond to a request for an advisory opinion so as to protect the integrity of the Court’s judicial function, it is part of its constant jurisprudence that it will only refuse to do so when there are ‘compelling reasons’: Accordance with International Law of the Unilateral Declaration of Independence in respect of Kosovo (Advisory Opinion) [2010] ICJ Rep 403, paras 30 and 35. Admittedly, the Court has previously held that, as a matter of principle, the advisory procedure should not be used to ‘circumvent’ the principle that a state is ‘not obliged to allow its disputes to be submitted to judicial settlement without its consent’: Western Sahara (Advisory Opinion) [1975] ICJ Rep 12, paras 32–33. Given the Court’s prior practice, however, it is clear that it would regard a request pertaining to the legality of secondary sanctions as more than a mere bilateral or plurilateral dispute be- tween the US and the EU, especially given the UNGA’s prior interest in the matter (note that the UNGA’s practice has been a relevant factor in previous cases: see, eg, Legal Consequences of the Construction of a Wall in the Occupied Palestinian Territory (Advisory Opinion) [2004] ICJ Rep 136, paras 49–50; Legal Consequences of the Separation of the Chagos Archipelago from Mauritius in 1965 (Advisory Opinion) [2019] ICJ Rep 95, paras 87–90), as evidenced by its periodic resolutions on unilat- eral coercive measures or on the Helms-Burton Act. For an example, see ‘Necessity of Ending the Economic, Commercial and Financial Embargo Imposed by the United States of America against Cuba’, UNGA Res 73/8 (1 November 2018) (adopted by 198 votes in favour and two against (US, Israel)). Accordingly, it is most unlikely that a request for an opinion pertaining to the legality of second- ary sanctions would result in the first ever refusal by the ICJ to answer a request stemming from the UNGA. 78 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 need not be construed in terms of a possible breach of a specific treaty clause. Instead, it would be possible to directly challenge their legality under customary international law, specifically in light of the customary rules on the exercise of jurisdiction which we have discussed above. Admittedly, an advisory opinion is not legally binding as such on individ- ual states, but its authority—reflecting, as it does, the legal understanding of the highest judicial organ of the UN—can hardly be ignored. Given the broad opposition to US secondary sanctions throughout the international community—including, for instance, at the level of the G77 and the Non-Aligned Movement393—an attempt to trigger an ad- visory procedure before the ICJ is likely to muster the necessary votes among UN General Assembly members. Still, a certain degree of cau- tion is warranted. First, while many states have consistently, and in broad terms, denounced secondary sanctions as contrary to customary rules on jurisdiction, the reality may be more complex in that—as explained above—depending on the underlying jurisdictional link (use of the US dollar, trade in US-origin goods, etc) and the consequence linked to the specific secondary sanctions (criminal prosecution, exclu- sion from the US financial market, etc), certain measures will breach customary international law while others will not. The implication is that the precise phrasing of a (hypothetical) request for an advisory opinion should be considered carefully in order to reduce the likelihood of producing an ICJ opinion that could legitimate certain sanctions based on a loose jurisdictional nexus. Second, while countries from the Global South may be inclined to support the idea of an advisory pro- ceeding before the ICJ, one should not ignore the fact that many of these countries are opposed not only to secondary sanctions, but also to ‘non- UN’ or ‘autonomous’ primary sanctions more generally, as the periodic debates at the UN General Assembly level regarding ‘unilateral eco- nomic coercion’ demonstrate.394 As a result, such countries may be inclined to broaden the scope of the question to be put before the Court so as to invite more general scrutiny of autonomous sanctions under cus- tomary international law. Inasmuch as the EU itself has become an ac- tive sanctioning state in recent years, this may not be in the EU’s own interest. It follows that, while a request for an ICJ advisory opinion offers a potentially useful instrument, it may also be a ‘blunt’ instru- ment, and one which may take a life of its own in light of the divergent legal convictions and political agendas of UN members. A potential so- lution to find a middle ground between the competing views on the le- gality of economic coercion in the Global South and the West could be to confine a possible request for an ICJ advisory opinion to the legality, under international law, of the Helms-Burton Act; an act with obvious
393 See note 8. 394 For an analysis, see Hofer, ‘The Developed/Developing Divide on Unilateral Coercive Measures: Legitimate Enforcement or Illegitimate Intervention?’. SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 79 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 extraterritorial features and which is condemned on a near-universal basis by the UN General Assembly year after year.395 b. Contentious litigation on the basis of the post-WWII Economic Cooperation Agreements Last but not least, reference must be made to a final set of bilateral trea- ties concluded between the US and individual European countries in the wake of the Second World War, and which lack the ‘security exception’ traditionally found in FCN treaties and BITs: the so-called ‘Economic Cooperation Agreements’.396 These treaties, which technically remain in force today, relate to relief operations and economic assistance to post-WWII Europe. Interestingly, while the substantive rights and obli- gations are different from those ordinarily found in FCN treaties and BITs and ostensibly have no relevance in a sanctions context, the trea- ties also contain complex compromissory clauses, which potentially pro- vides for broad access to ICJ dispute settlement. For instance, article X of the 1948 Cooperation Agreement between the US and Belgium (‘Settlement of claims of nationals’) states that: 1. The Governments of the [US] and of Belgium agree to submit to the decisions of the [ICJ] any claim espoused by either Government on behalf of one of its nationals against the other Government for com- pensation for damage arising as a consequence of Governmental meas- ures ... taken after April 3, 1948, by the other Government and affecting property or interests of such national, including contracts with or concessions granted by duly authorized authorities of such other Government. It is understood that the undertaking of each Government in respect of claims espoused by the other Government pursuant to this paragraph is made in the case of each Government under the authority of and is limited by the terms and conditions of such effective recognition as it has heretofore given to the compulsory jurisdiction of the [ICJ] under Article 36 of the Statute of the Court. The provisions of this paragraph shall be in all respects without preju- dice to other rights of access, if any, of either Government to the [ICJ] ... 3. It is further understood that neither Government will espouse a claim pursuant to this Article until its national has exhausted the remedies
395 See, eg, ‘Necessity of Ending the Economic, Commercial and Financial Embargo Imposed by the United States of America against Cuba’, UNGA Res 73/8 (1 November 2018) (adopted by 198 votes in favour and two against (US, Israel)). See in particular preambular para 4, stating that the extraterritorial effects of the Act ‘affect the sovereignty of other States, the legitimate interests of entities or persons under their jurisdiction and the freedom of trade and navigation’. 396 The ICJ’s indicative list of treaties containing compromissory clauses on the website of the ICJ (see note 149) mentions Economic Co-operation Agreements concluded by the US with the fol- lowing EU Member States: Italy (28 June 1948), France (28 June 1948), Denmark (29 June 1948), Austria (2 July 1948), the Netherlands (2 July 1948), Greece (2 July 1948), Belgium (2 July 1948), Luxembourg (3 July 1948), Sweden (3 July 1948), the UK (6 July 1948), and Portugal (28 September 1948). 80 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020
available to him in the administrative and judicial tribunals of the country in which the claim arose.397 In essence, this clause—and the parallel provisions in several other Economic Cooperation Agreements—enable each party to initiate con- tentious proceedings before the ICJ, as part of its right to exercise diplo- matic protection, when one of its nationals suffers damage as a result of a governmental measure of the other party. The type of ‘governmental measures’ is not circumscribed, and could potentially encompass a range of secondary sanctions instruments. A critical observer might object that recourse to the ICJ is excluded due to the fact that the clause itself refers to the extent to which the parties have accepted the compulsory jurisdic- tion of the ICJ under article 36 of the ICJ Statute, and that—as is well- known—the US has long since revoked its declaration accepting com- pulsory jurisdiction.398 This may well be so, yet the word ‘heretofore’ in the cited clause could arguably be read as referring to the extent to which the respective parties agreed to ICJ compulsory jurisdiction at the time of adoption of the Economic Cooperation Agreement (in this case, in 1948). If this interpretation is adopted, it would in principle be pos- sible to invoke the 1946 US declaration recognizing compulsory juris- diction399 (in combination with the parallel declaration of the other party, eg Belgium400 or France401) to trigger ICJ proceedings, notwith- standing the US having subsequently revoked this declaration. In any case, it must be recalled that even if one adopts this interpretation, re- course to the ICJ still presupposes that a Belgian company (for example) suffers damage pursuant to US secondary sanctions, and that it first raises a challenge before the US domestic courts and exhausts local rem- edies.402 In addition, subsequent ICJ proceedings would be limited to alleged internationally wrongful conduct vis-a`-vis the company con- cerned, albeit the outcome of such proceedings could, of course, set an
397 Economic Cooperation Agreement between the United States of America and the Kingdom of Belgium (adopted 2 July 1948, entered into force 29 July 1948) 19 UNTS 127. See also art X of the Economic Cooperation Agreement between the United States of America and France (adopted 28 June 1948, entered into force 10 July 1948) 19 UNTS 9. 398 In 1984, the US modified its declaration (1354 UNTS 452). A year later, it gave notice of the termination of its declaration accepting compulsory jurisdiction (1408 UNTS 270). The termination constituted a response to the ICJ’s affirmation of jurisdiction in the case brought against the US by Nicaragua. 399 Declaration of the United States of America Recognizing as Compulsory the Jurisdiction of the Court, in conformity with Article 36, paragraph 2, of the Statute of the International Court of Justice (14 August 1946) 1 UNTS 9. 400 For the original Belgian declaration of 13 July 1948 (valid for a period of five years), see 16 UNTS 203. For the modified declaration, see 302 UNTS 251. 401 For the original French declaration of 18 February 1947, see 26 UNTS 91. The declaration was modified in 1959 (337 UNTS 65) and 1966 (562 UNTS 71). The declaration was terminated in 1974 (907 UNTS 129). 402 On the exhaustion of local remedies, see arts 14–15 of the ILC Draft Articles on Diplomatic Protection. SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 81 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 important precedent and provide useful guidance on the outer limits of the exercise of jurisdiction by states in the sanctions context.
VI. CHALLENGING US SECONDARY SANCTIONS THROUGH NON-JUDICIAL MEANS:THE EU BLOCKING STATUTE
The previous part sought to identify the various ways in which third states or private persons could raise a judicial challenge against second- ary sanctions. Faced with the slow grinding of the wheels of justice, however, and the uncertain implementation of an international judg- ment or award, third states adversely affected by US sanctions may be tempted to respond more swiftly by taking unilateral self-help measures. One of the legal means available to third states to counteract (US) sec- ondary sanctions (regardless of the illegality of such sanctions) is the en- actment of blocking statutes. The enactment of statutes which ‘block’ foreign states’ extraterritorial legislation is not unique to the context of secondary sanctions. In fact, the first blocking statutes were aimed at mitigating the adverse effects of the extraterritorial application of US antitrust law, but they were later applied to secondary sanctions.403 In the context of secondary sanctions, the best-known example is undeni- ably the 1996 EU Blocking Statute,404 which was triggered by the US enactment of the Helms-Burton Act and the Iran Libya Sanctions Act in that same year.405 The EU Blocking Statute prohibits EU persons from complying with US sanctions legislation and allows them to re- cover damages suffered as a result of the application of this legislation (‘clawback’). The Regulation lay dormant for a long time as successive US presidents suspended the controversial Title III of the Helms- Burton Act, and as EU and US sanctions regarding Iran started to con- verge after 2006.406 However, the Blocking Statute was reactivated after President Trump denounced the JCPOA and reimposed the full range of US sanctions against Iran, including secondary sanctions affecting
403 See, eg, the UK’s Protection of Trading Interests Act 1980; The Protection of Trading Interests (US Reexport Control) Order 1982, SI 1982/885; The Protection of Trading Interests (US Cuban Assets Control Regulations) Order 1992, SI 1992/2449; The Extraterritorial US Legislation (Sanctions against Cuba, Iran and Libya) (Protection of Trading Interests) Order 1996; and The Extraterritorial US Legislation (Sanctions against Cuba, Iran and Libya) (Protection of Trading Interests) (Amendment) Order 2018, SI 2018/1357. See also Canada’s Foreign Extraterritorial Measures Act and Mexico’s, Ley de Proteccio´n al Commercio y la Inversio´n de Normas Extranjeras que Contravengan el Derecho Internacional. 404 1996 EU Blocking Statute. 405 ibid, annex. 406 For EU restrictive measures against Iran following the UN Security Council’s adoption of resolutions requiring Iran to stop enriching uranium with nuclear proliferation purposes, see European Council and Council of the EU, ‘EU Restrictive Measures Against Iran’
407 Commission Implementing Regulation (EU) 2018/1101 of 3 August 2018 laying down the criteria for the application of the second paragraph of Article 5 of Council Regulation (EC) No 2271/ 96 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom [2018] OJ L199/I/1. The relevant US sec- ondary sanctions are listed in the annex of the Regulation. 408 This part is based in part on C Ryngaert, ‘De Europese “Blocking Statute”: Een Probaat Middel om het Europese Bedrijfsleven te Beschermen tegen de Amerikaanse Secundaire Sancties tegen Iran?’ (2019) SEW Tijdschrift voor Europees en Economisch Recht 157. 409 European Commission, ‘Guidance Note – Questions and Answers: Adoption of Update of the Blocking Statute’ [2018] OJ C277/I/4, I/8. 410 For case law, see, eg, Mamancochet Mining Limited v Aegis Managing Agency Ltd & Others [2018] EWHC 2643 (Comm); PAM International NV v Exact Software Nederland BV NL:RBDHA:2019:6301 (District Court (The Hague), 25 June 2019). For doctrine, see, eg, Van Haute, Nordin, and Forwood, ‘The Reincarnation of the EU Blocking Regulation: Putting European Companies Between a Rock and a Hard Place’; M Lieberknecht, ‘Die Blocking- Verordnung: Das IPR als Instrument der Außenpolitik’ (2018) 38 Praxis des Internationalen Privat- und Verfahrensrechts 573. 411 See, eg, European Banking Federation (EBF), ‘EBF comments on the EU Blocking Regulation’ (Doc No EBF_033606, 1 August 2018); UK Finance, ‘The EU Blocking Regulation – Issues and Considerations for the Financial Services Sector’ (11 July 2018)
in L Van den Herik (ed), Research Handbook on UN Sanctions and International Law (Edward Elgar 2017). The distinction between ‘retorsions’ and ‘countermeasures’ can be difficult to make in prac- tice, in light of uncertainties over the precise substance of customary international law (eg, the scope of the non-intervention principle) and the wide range of applicable treaty law. Sossai has argued that the Blocking Statute is a countermeasure within the meaning of art 49 of the Draft Articles on State Responsibility: see M Sossai, ‘Legality of Extraterritorial Sanctions’ in M Asada (ed), Economic Sanctions in International Law and Practice (Routledge 2019) 62, 69. However, while the Blocking Statute evidently counters the effects of secondary sanctions, its provisions do not amount to inter- nationally wrongful acts, the wrongfulness of which needs to be precluded under the doctrine of countermeasures. 415 1996 EU Blocking Statute, art 11. This article also applies to a number of specific categories, eg, in the shipping sector. All relevant persons have a strong connection to the EU. 416 European Commission, ‘Guidance Note – Questions and Answers: Adoption of Update of the Blocking Statute’, I/10 (question 21). It is not entirely clear whether the Blocking Statute would be violated if a US parent applies with OFAC for its EU subsidiary. 417 Van Haute, Nordin, and Forwood, ‘The Reincarnation of the EU Blocking Regulation: Putting European Companies Between a Rock and a Hard Place’, 499. A Commission official admit- ted that this is potentially far-reaching, but that in practice it has not yet led to major problems: Interview with Commission representative (16 May 2019). 418 European Commission, ‘Guidance Note – Questions and Answers: Adoption of Update of the Blocking Statute’, I/10 (question 22). 419 Van Haute, Nordin, and Forwood, ‘The Reincarnation of the EU Blocking Regulation: Putting European Companies Between a Rock and a Hard Place’, 499. 420 1996 EU Blocking Statute, art 2. 421 FMLC, ‘U.S. Sanctions and the E.U. Blocking Regulation: Issues of Legal Uncertainty’, paras 3.25–26. 422 Interview with Commission official (16 May 2019). 84 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 notify the EU because their notification is communicated to the EU Member States concerned, which may possibly put them on a watch-list at the national level. Where companies notify the Commission, the Commission does not give final answers on whether there might be a breach or not, but may refer them to national sanctions authorities.423 Some doubts have been raised as to the applicability of the notification obligation to directors, managers, or other persons with management responsibilities without EU nationality, and who may even be based out- side the EU while serving as officers of EU persons subject to the Blocking Statute.424 Pursuant to the prohibition of recognition: [n]o judgment of a court or tribunal and no decision of an administrative au- thority located outside the Community giving effect, directly or indirectly, to the laws specified in the Annex or to actions based thereon or resulting there- from, shall be recognized or be enforceable in any manner.425 This is the ‘blocking’ provision from which the Regulation takes its name.426 The prohibition of recognition potentially affects a broad range of measures.427 It implies a duty for Member States not to honour an extradition request from the US that is at least partly based on a charge that the sought person has violated US secondary sanctions covered by the Blocking Statute. 428 Only if the extradition request is also based on other grounds may the request be granted by EU Member States.429Non-recognition under the Blocking Statute also implies that EU Member States’ courts cannot honour US requests to produce docu- ments located in the EU, or provide other mutual legal assistance to the US, to the extent that such assistance relates to US enforcement of sec- ondary sanctions.430 For example, in August 2019, Gibraltar’s Ministry of Justice considered itself unable to honour a US legal assistance re- quest in support of a US application for the restraint of the departure
423 ibid. 424 The FMLC has signalled that the Blocking Statute is likely to apply to these persons (FMLC, ‘U.S. Sanctions and the E.U. Blocking Regulation: Issues of Legal Uncertainty’, para 3.49). Art 2 of the 1996 EU Blocking Statute provides in general terms that the notification obliga- tion ‘applies to the directors, managers and other persons with management responsibilities’. 425 1996 EU Blocking Statute, art 4. 426 Also, the EU uses the term in its communication: see European Commission, ‘Updated Blocking Statute in Support of Iran Nuclear Deal’ (6 August 2018)
A. The compliance prohibition Pursuant to article 5 of the Blocking Statute, no EU person ‘shall com- ply, whether directly or through a subsidiary or other intermediary per- son, actively or by deliberate omission, with any requirement or prohibition, including requests of foreign courts, based on or resulting, directly or indirectly, from’ US secondary sanctions legislation.434 This means that EU persons are barred from complying with US sanctions law, even if in so doing they expose themselves to US sanctions. The Commission gives a wide interpretation to the prohibition; even the mere filing of a request with US authorities for a derogation or exemp- tion from US sanctions law is covered by the EU prohibition, unless the person obtains prior permission from the Commission.435 Still, it is not entirely clear yet precisely what transactions are covered by the
431 HM Government of Gibraltar, ‘Further Mutual Legal Assistance Requests from the United States of America – 604/2019’ (18 August 2019)
1. Compliance authorization The prohibition from complying with US sanctions law can have a major impact on EU persons, who risk ending up between a rock and a hard place.437 If they comply with US sanctions law, they may be sanc- tioned in Europe. If they comply with the EU prohibition, they may be penalized in the US.438 To some extent, the Council of the EU is aware of this: the Regulation provides that ‘[p]ersons may be authorized ... to comply fully or partially to the extent that non-compliance would ser- iously damage their interests or those of the Community’.439 The Commission grants the authorization,440 assisted by a committee con- sisting of representatives of the Member States and chaired by a Commission representative.441 The criteria for the granting of an au- thorization were only made explicit in a 2018 implementing regula- tion,442 prompted by the re-imposition of US sanctions against Iran and the reactivation of the Blocking Statute. This implementing regulation summarizes a large number of non-cumulative criteria which can be used to assess whether non-compliance would seriously damage EU per- sons’ interests or those of the EU, eg, ‘whether the protected interest is likely to be specifically at risk, based on the context, the nature and the origin of a damage to the protected interest’.443 However, it stands to reason that the Commission will grant authorization to comply with US
436 While art 5 of the Blocking Statute does not refer to extraterritoriality, art 1 does. On this basis, it has been argued that ‘Article 5 should not, in principle, apply to situations when there is no extra-territorial application of the specified U.S. sanctions’, although it has also been noted that it is not fully clear what measures are precisely extraterritorial: FMLC, ‘U.S. Sanctions and the E.U. Blocking Regulation: Issues of Legal Uncertainty’, para 3.5. 437 On the comparable situation of Canadian persons being caught between the rock of US law and the hard place of Canadian blocking legislation, see H Scott Fairley, ‘Between Scylla and Charybdis: The US Embargo of Cuba and Canadian Foreign Extraterritorial Measures Against It’ (2010) 44 The International Lawyer 887. 438 In one recent settlement notice, OFAC even appears to suggest that a company’s reliance on the EU Blocking Statute may qualify as an ‘aggravating factor’ for the purposes of applying OFAC’s Economic Sanctions Enforcement Guidelines: see OFAC, ‘Enforcement information for December 9, 2019’
2. Direct enforcement under public law In most cases, EU persons’ compliance with US secondary sanctions will result in a violation of the EU Blocking Statute. It remains unclear, however, to what extent these persons will be sanctioned in the EU. The Commission itself does not have the mandate to impose sanctions. Pursuant to the Blocking Statute this is within the competence of the Member States, which ‘shall determine the sanctions to be imposed in the event of breach of any relevant provisions’, sanctions which must be ‘effective, proportional and dissuasive’.446 However, the Commission can request that Member States initiate an investigation; something which has occurred at least once.447 Even if they start an investigation, it is not likely that Member States will readily impose sanctions on corporations which comply with US sanctions, out of fear of US enforcement or exclusion from the US market,448 and certainly not if such corporations are ‘national
444 See European Commission, ‘Guidance Note – Questions and Answers: Adoption of Update of the Blocking Statute’, I8/9 (question 16). Compare the legal standard urged by the European Banking Federation: ‘[G]lobally, all situations that automatically lead to submission to the US laws should be considered to characterise a serious damage to a person’s interests’ (EBF, ‘EBF comments on the EU Blocking Regulation’, 8). 445 Interview with Commission official (16 May 2019). According to this official, the requests stem from a mixture of sectors and involve both large and small companies. 446 1996 EU Blocking Statute, art 9. For Member States’ implementing legislation see, eg, The Netherlands (Wet van 24 December 1998 tot uitvoering van verordening (EG) nr 2271/96 van de Raad van de Europese Unie van 22 November 1996; Wet van 22 Juni 1950, houdende vaststelling van regelen voor de opsporing, de vervolging en de berechting van economische delicten; Ministerie van Buitenlandse Zaken, ‘Kamerbrief over Instelling Sancties door de Verenigde Staten tegen Iran en Gevolgen voor het Nederlandse Bedrijfsleven’ (BZDOC-403887767-56, 2 November 2018)); Belgium (Wet houdende diverse financie¨le bepalingen, Belgisch Staatsblad, 21 May 2019, No 2019012449, p 48120, Title VII); and Germany (s 82(2) of the Außenwirtschaftsverordnung of 2 August 2013). It is not clear in all Member States which domestic authority is responsible for the implementation of the Blocking Statute. See, notably, the situation in the UK: FMLC, ‘U.S. Sanctions and the E.U. Blocking Regulation: Issues of Legal Uncertainty’, paras 3.71–77. 447 C Driessen, ‘Douane Kijkt naar Overtreding Europese Boycotwet door Exact’ NRC (12 June 2019)
3. Incidental enforcement by courts hearing contractual disputes The compliance prohibition may not only be directly enforced by law- enforcement agencies which can impose public law penalties (adminis- trative fines and criminal penalties), but could also be invoked in con- tractual, commercial, or other private law disputes before the civil and commercial courts of EU Member States. A typical scenario would in- volve Party A withdrawing from a contractual arrangement lest it fall foul of US sanctions, with Party B asking a domestic court to enjoin Party A to honour the contract, citing the compliance prohibition in the Blocking Statute. This scenario came before the District Court of The Hague in June 2019, in a case pitting Dutch software producer Exact against Curac¸ao-based company PAM, which distributes the software in Cuba. After Exact was taken over by US investment corporation KKR, it halted its distribution contract with PAM. Reasons were not given, but apparently Exact feared the long of arm of the Helms-Burton Act. PAM subsequently sued Exact for breach of contract, and alleged that Exact, being incorporated in an EU Member State, is prohibited from complying with US sanctions pursuant to the Blocking Statute. In its decision of 25 June 2019, the Hague District Court found Exact to be at fault and enjoined it to honour its contract with PAM.456 The Court nevertheless stopped short of finding Exact to be in violation of the Blocking Statute. Rather, it considered that Exact could not invoke force majeure to justify its breach of contract, as it ended up in the situation as a result of a deliberate choice of its new shareholder KKR. Still, the Court reminded Exact of the possibility that, by complying with the Helms-Burton Act, it violated Dutch criminal law implementing the Blocking Statute.457 As Exact has now been enjoined by the Court to
454 ‘Austria Charges Bank after Cuban Accounts Cancelled’ Reuters (27 April 2007)
458 See note 438 above. See also In re Sealed Case No 19-5068 (DC Cir, 6 August 2019) (ruling that the US Department of Justice has the authority to require foreign financial institutions to dis- close transactions from non-US accounts insofar as these transactions are related to these institu- tions’ US correspondent accounts, and rejecting the argument that foreign governments may bar their institutions from disclosing information to the US). Foreign courts sometimes believe, how- ever, that a foreign sovereign compulsion defence may well be successful: see ‘Brazil court orders Petrobras to refuel Iran grain vessels’ Reuters (25 July 2019)
460 Mamancochet Mining Limited v Aegis Managing Agency Ltd & Others. 461 ibid. After all was said and done, however, the court did not have to take a decision on this as, according to the court, the insurers were not subject to US or European sanctions to the extent that they paid out before 4 November 2018; only after that date did the relevant US sanctions entered into force. In a 2019 judgment pertaining to the interpretation of a sanctions clause in a loan agree- ment, the High Court held, somewhat similarly, that a borrower would not be in default if it refused to make repayments ‘in order to comply with any mandatory provision of law’, in this case a provi- sion of US sanctions law. The High Court did not consider the EU Blocking Statute to be relevant, however, as ‘[t]he laws giving rise to the issue in this case are not included within the Appendix to Regulation 2271/96’; hence there would be no ‘mandatory rule’ of UK or EU law: Lamesa Investments Limited v Cynergy Bank Limited [2019] EWHC 1877, para 30. 462 For a private law analysis of the Regulation, see Lieberknecht, ‘Die Blocking-Verordnung: Das IPR als Instrument der Außenpolitik’. 463 Van Haute, Nordin, and Forwood, ‘The Reincarnation of the EU Blocking Regulation: Putting European Companies Between a Rock and a Hard Place’, 498. 464 See EBF, ‘EBF comments on the EU Blocking Regulation’, 4. For some examples of how a carve-out clause might look like in practice, see FMLC, ‘U.S. Sanctions and the E.U. Blocking Regulation: Issues of Legal Uncertainty’, annex A. 92 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 respondent banks may refuse to cooperate, or that the EU-based bank may be exposed to US secondary sanctions.465 Such justifications were, in the past, accepted by European courts.466
4. Deterrence It is doubtful whether European sanctions will have a strong deterrent effect. Companies may harbour the reasonable belief that Member States will not be willing to take enforcement against them for breach of the compliance prohibition, or that the compliance prohibition is not likely to be successfully invoked in contractual disputes. They may even take for granted exposure to EU enforcement action as a result of com- pliance with US law. Commercial logic may well dictate that the risk of exposure to US sanctions outweighs the risk of exposure to European sanctions: companies may not want to risk heavy US fines or denial of access to the US market (which may well be considered an even more se- vere penalty).467 An EU person’s strategic choice to comply with US law may obviously undermine the effectiveness of the Blocking Statute. There is indeed an unsurprising tendency of EU-based financial insti- tutions and other corporations to comply with US sanctions, and not to be too bothered by the EU Blocking Statute468 (as SWIFT’s decision to drop all but a few of its Iranian customers clearly illustrates).469 Steps to divest from Iran had often already been taken before the actual reinstate- ment of US sanctions against Iran and the reactivation of the Blocking Statute. Examples of EU corporations halting, or severely restricting, business with Iran are rife.470 For instance, the European Investment Bank, of which EU Member States are shareholders, discontinued its investments in Iran, apparently for fear that otherwise it would be denied access to the US capital market.471 Likewise, Deutsche Telekom closed the phone and Internet connections of a number of Iranian banks established in Germany, apparently lest the US impose sanctions on the
465 See an Italian judgment reported in M Lester, ‘Italian Judgments on the EU Blocking Regulation’ (EU Sanctions, 2 October 2019)
B. Clawback The Blocking Statute entitles an EU person to recover any damages, including legal costs, caused to that person by the application of US sec- ondary sanctions.476 This is a private enforcement or ‘clawback’ right, which is inspired by a similar right in the 1980 British Protection of Trading Interests Act, which entitled a UK person to recover from the party in whose favour a foreign (US) judgment was given so much of the amount as exceeds the part attributable to compensation.477 With this clawback right, the UK hoped to mitigate the extraterritorial application of US antitrust law vis-a`-vis UK corporations, and in particular the granting of multiple (punitive or treble) damages in the US.478 Somewhat similarly, with the clawback right, the EU hopes to mitigate the extraterritorial application of US secondary sanctions by giving EU persons the right to obtain recovery ‘from the natural or legal person or any other entity causing the damages or from any person acting on its behalf or intermediary’.479 Pursuant to the Regulation, such recovery ‘could take the form of seizure and sale of assets held by those persons,
472 M Bru¨ggmann, ‘Telekom stellt iranischer Bank in Hamburg die Telefone ab’ Handelsblatt (22 November 2018)
480 ibid. 481 22 USC §§ 6021–91. 482 EU Member States are required to provide information on the use of the clawback clause to the Commission (1996 EU Blocking Statute, art 10), but at the time of writing nothing had been reported. 483 On whether clawback can be relied on to claim damages from the US itself, see Part IV.A.1 (discussing possible exceptions to state immunity). 484 See, eg, M Jones and E Bailes, ‘US Iran Sanctions and the EU Blocking Regulation – Private Law Claims for Damages’ (Lexology, 31 July 2018)
C. Directly challenging US secondary sanctions before European courts: The hurdle of state immunity As explained in Section B, the EU Blocking Statute has created a specif- ic cause of action enabling natural and legal persons to recover damages caused to them by the application of secondary sanctions.491 This ‘claw- back’ right is likely to be used mainly in proceedings against commercial parties who withdraw from financing agreements and supply
486 Art 6(3) of the 1996 EU Blocking Statute, provides that the 1968 Brussels Convention ‘shall apply to proceedings brought and judgments given’ pursuant to clawback. In the meantime, Regulation (EU) No 1215/2012 has replaced the Brussels Convention. 487 Germany, Code of Civil Procedure (Zivilprozessordnung) of 5 December 2005, BGBl I 3202 § 23; Austria, Court Jurisdiction Act (Jurisdiktionsnorm) of 1 August 1895, Reichsgesetzblatt No 111/ 1895 § 99; Swedish Code of Judicial Procedure (Ra¨ttegangsbalken) of 1 January 1948, Ds 1998:000, chapter 10, s 3. 488 1996 EU Blocking Statute, art 5. Still, the Commission believes that authorization does shield a person from application of the clawback clause: Interview with Commission official (16 May 2019). 489 For the concerns of the European Banking Federation in this respect, see EBF, ‘EBF com- ments on the EU Blocking Statute’, 9. 490 European Parliament Research Service, ‘Updating the Blocking Regulation: The EU’s an- swer to US extraterritorial sanctions’ (Report PE 623.535, June 2018) 6. 491 1996 EU Blocking Statute, art 6. 96 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 contracts.492 The question arises, however, as to whether the US Government itself, which enacted the secondary sanctions, can directly be challenged before the courts of EU Member States (or any foreign court, for that matter). Interestingly, the Commission’s Guidance Note on the Blocking Statute explicitly raises the question of whether ‘EU operators [can] sue the U.S. authorities in order to recover damages’.493 No explicit answer is provided, however. On the one hand, the Guidance Note stresses that the wording of the Blocking Statute is ‘very broad’. On the other hand, it asserts that questions such as who may be the defendant, what damage can be recovered, etc, are matters for the competent court, the identifica- tion of which is, in turn, to be determined by reference to the Brussels I Regulation.494 Yet article 1(1) of that Regulation clarifies that its scope is limited to ‘civil and commercial matters’, and that its rules on the ex- ercise of jurisdiction do not extend to ‘the liability of the State for acts and omissions in the exercise of State authority (acta iure imperii)’. It follows that an actual right of action against the US in respect of dam- ages caused by secondary sanctions cannot be found in the EU Blocking Statute, nor is such right of action easily found in national legislation. Even assuming a right of action could be found in the domestic law of an EU Member State that would allow proceedings to hold the US li- able, a number of obstacles render such a de´marche highly unlikely to succeed. Possible obstacles include, for instance, the domestic doctrines of non-justiciability (or ‘international act of state’)495 or forum non con- veniens. However, the most obvious hurdle stems from the customary international law on state immunity. As is well known, ‘state immunity’ constitutes a procedural bar against the exercise of jurisdiction by domestic courts in proceedings where a foreign state is impleaded. The doctrine is generally seen as a corollary of the principle of sovereign equality under international law, as reflected in the Latin maxim ‘par in parem non habet imperium’. It is firmly established in customary international law.496 A majority of states nowadays accept that state immunity is no longer absolute, and applies
492 Part V.B. 493 European Commission, ‘Guidance Note – Questions and Answers: Adoption of Update of the Blocking Statute’, I/8. 494 Regulation (EU) No 1215/2012. Note: the Brussels I Regulation has replaced the 1968 New York Convention to which the original Blocking Statute refers. 495 This doctrine entails that domestic courts will not adjudicate upon the acts of foreign states, even beyond their own territory, which are done on the international plane. The act of state doctrine is mostly known in common law jurisdictions, yet partial analogues exist in the ‘local procedural pat- ois’ of most jurisdictions: T Ruys, ‘The Role of State Immunity and Act of State in the NM Cherry Blossom case and the Western Sahara Dispute’ (2019) 68 ICLQ 80. 496 See, eg, Jurisdictional Immunities of the State (Germany v Italy; Greece intervening) (Merits) [2012] ICJ Rep 99, paras 55–57; Belhaj and another v Straw and others; Rahmatullah (No 1) v Ministry of Defence and another [2017] UKSC 3 [12] (Lord Mance); Benkharbouche v Secretary of State [2017] UKSC 62 [17] (Lord Sumption). SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 97 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 only to ‘acta jure imperii’ (acts in the exercise of sovereign authority) as opposed to ‘acta jure gestionis’, ie, commercial acts or other conduct that can equally stem from private persons.497 In the present context, how- ever, it is beyond question that the application and enforcement of the contested secondary sanctions—even if contrary to international law— involve an exercise of state authority. This creates a strong, virtually in- surmountable, presumption that the US authorities benefit from im- munity from jurisdiction in domestic proceedings before non-US courts relating to its secondary sanctions. The case law of the ICJ confirms that state immunity for acta jure imperii must be upheld, even if the contested state conduct entails ‘grave’ violations of international law, and even vio- lations of peremptory norms of international law.498 A rare exception to this far-reaching immunity is the so-called ‘terri- torial tort’ exception. This exception finds expression in the European Convention on State Immunity499 and the UN Convention on State Immunity,500 and deals with tort liability for acts that have taken place within the territory of the forum state. However, leaving aside uncer- tainties pertaining to its precise scope,501 the ‘territorial tort’ exception is of no use in connection with damage resulting from US secondary sanctions since, among other things, the required territorial nexus— according to which the facts occasioning damage to property must have occurred in the territory of the forum state502—is manifestly lacking. In conclusion, under the current state of customary international law it seems impossible to overcome the procedural obstacle of immunity from jurisdiction with a view to holding the US liable for damage caused by secondary sanctions in European courts. In light of their respective scope, copying the (controversial) exceptions of the US Foreign Sovereign Immunities Act with respect to state-sponsored terrorism or unlawful expropriation at the European level does not seem conducive to confronting US secondary sanctions.503 Furthermore, the creation of
497 For a critical analysis of the distinction between the two, see A Orakhelashvili, ‘Jurisdictional Immunity of States and General International Law – Explaining the Jus Gestionis v. Jus Imperii Divide’ in T Ruys and N Angelet (eds), The Cambridge Handbook of Immunities and International Law (CUP 2019). 498 Jurisdictional Immunities, para 91. In a similar vein, see Jones and Others v United Kingdom App nos 34356/06 and 40528/06 (ECtHR, 14 January 2014) para 198; Belhaj [14] (Lord Mance). 499 European Convention on State Immunity (adopted 16 May 1972, entered into force 11 June 1976) 1495 UNTS 181 (ECSI). 500 United Nations Convention on Jurisdictional Immunities of States and Their Property (adopted 2 December 2004, not yet in force) UN Doc A/RES/59/38 (16 December 2004) (UNCSI). 501 See further S El Sawah, ‘Jurisdictional Immunity of States and Non-Commercial Torts’ in T Ruys and N Angelet (eds), The Cambridge Handbook of Immunities and International Law (CUP 2019). 502 Paraphrasing the language of ECSI, art 11. 503 The so-called ‘terrorism exception’ holds that state immunity be set aside in respect of so- called ‘state sponsors of terrorism’ (designated as such by the US Department of State) when US nationals claim damages for personal injury or death caused by certain terrorist acts abroad: 28 USC § 1605(a)(1). For a detailed analysis, see DP Stewart, ‘Immunity and Terrorism’ in T Ruys and N Angelet (eds), The Cambridge Handbook of Immunities and International Law (CUP 2019). The ex- ception seems difficult, if not impossible, to reconcile with the ICJ’s findings in Jurisdictional 98 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 another novel and tailor-made exception to immunity from jurisdiction in respect of secondary sanctions would probably run counter to inter- national law, and threaten to undermine the delicate equilibrium upon which state immunity is premised. Last but not least, even if immunity from jurisdiction were to be cast aside, immunity from execution still prevents enforcement measures against state property other than prop- erty ‘specifically in use or intended for use by the state for other than government non-commercial purposes’.504
D. Concluding observations At the time of writing, the EU Blocking Statute has mainly proved to be a paper tiger that has had little deterrent effect.505 Apart from one Austrian case in 2007, EU Member State authorities have not yet
Immunities (eg, para 88). The exception has been condemned by the Non-Aligned Movement (‘Communique´ of the Coordinating Bureau of the Non-Aligned Movement in rejection of unilateral actions by the United States in contravention of international law, in particular the principle of State immunity’ (6 May 2016) UN Doc S/2016/420). Canada remains the only country so far to have adopted a similar terrorism exception (State Immunity Act, RSC 1985, c S-18, s 6). Apart from the fact that the exception is extremely controversial and is seen by many as contrary to cus- tomary international law, it is inconceivable—given its specific scope—that it could somehow be helpful in confronting unlawful extraterritorial sanctions. Nor would a European version of the US exception to state immunity in respect of ‘property taken in violation of international law’ (28 USC § 1605(a)(3)) seem capable of facilitating direct challenges of US secondary sanctions in domestic courts. Even if secondary sanctions may entail a form of (indirect) expropriation (see Part III.C), one should not lose sight of the limited scope of the FSIA’s ‘expropriation exception’. First, the ex- ception has generally been interpreted as applying only to the wrongful taking of ‘tangible’ property, as opposed to intangible property such as bank accounts (see X Yang, State Immunity in International Law (CUP 2012) 305–307; but see, for a judgment to the contrary, Nemariam v Ethopia 491 F 3d 470, 475 (DC Cir 2007)). Second, art 1605(a)(3) FSIA still requires a territorial nexus to the US. Thus, the property concerned should be present in the US or should be owned or operated by an agency or instrumentality of the foreign State that is active in the US. Third, the property must be used in connection with a commercial activity. 504 UNCSI, art 19(c); Jurisdictional Immunities, para 116. See further J-M Thouvenin and V Grandaubert, ‘The Material Scope of State Immunity from Execution’ in T Ruys and N Angelet (eds), The Cambridge Handbook of Immunities and International Law (CUP 2019). 505 See also L Gussetti, ‘Extraterritorial Sanctions and the EU: Challenges and Legal Counter- Instruments’ in ECB, Building Bridges: Central Banking Law in an Interconnected World (ECB 2019), 185 (the author, a member of the Legal Service of the European Commission, argues that the Blocking Statute does not have deterrent effect). That is not to say the EU Blocking Statute has had no impact on the conduct of EU companies whatsoever. By way of illustration, when the US Department of State threatened to prohibit the CEO of Melia from entering the US unless the hotel group accepted certain conditions related to the activities of subsidiary companies in Cuba, the com- pany responded that the conditions were ‘not acceptable’, and that ‘compliance with them would also have been contrary to European regulations (known as the Blocking Statute) which considers the Helms Burton Act a violation of the most elementary principles of international law’: ‘Statement by Melia Hotels International’. The statement further indicates that the issue ‘has been placed in the hands of the Spanish and community institutions and authorities’ (ibid). A Spanish court had previously dismissed a claim by a US company accusing Melia of profiting off confiscated land in Cuba in light of Cuba’s immunity from jurisdiction with respect to acta jure imperii: A Pastor, ‘Spanish Court Decision following end of suspension of the US Helms-Burton Act: jurisdiction declined in claim concerning assets nationalized by Cuba’ (Herbert Smith Freehills Public International Law Notes, 14 November 2019)
VII. CHALLENGING US SECONDARY SANCTIONS THROUGH NON-JUDICIAL MEANS:OTHER OPTIONS
It is doubtful whether the EU Blocking Statute can effectively counter- act the adverse effects of US secondary sanctions. In reality, enacting a blocking statute may be like bringing a knife to a gunfight. As argued in the previous part, the Blocking Statute may punish rather than protect EU persons affected by secondary sanctions, and in any event, actual en- forcement and use of the Blocking Statute leave much to be desired. Ultimately, the Statute has hardly dented the effectiveness of US sec- ondary sanctions, as borne out by EU corporations’ large-scale divest- ment from Iran after the reinstatement of US sanctions. If the Blocking Statute ultimately only gives limited protection against US sanctions, other non-judicial responses to US secondary sanctions may have to be explored. One viable course of action, discussed above (see Part IV.A), would be for EU Member States to voice their opposition within the IMF to secondary restrictions on international payments, or to push for a broader review of the IMF’s approach to security restrictions. In this part, a number of other non-judicial responses are explored.
506 It has also been suggested to focus enforcement on instances of overcompliance rather than compliance with US sanctions, overcompliance meaning abiding by US secondary sanctions legisla- tion even if such legislation does not apply to the relevant transactions (eg, related to trade in hu- manitarian goods): Geranmayeh and Lafont Rapnouil, ‘Meeting the Challenge of Secondary Sanctions’, 9. Limiting enforcement to instances of overcompliance rather than compliance may also prevent tensions arising with the US. At the same time, it is not entirely clear how the Blocking Statute can sanction overcompliance, as overcompliance is not an ‘application’ of US secondary sanctions legislation. Accordingly, instances of overcompliance may well be beyond the scope of the Blocking Statute and national enforcement of the Statute. 100 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 As most possible responses are of a political rather than legal na- ture,507 it exceeds the scope of this legal contribution to explore all pos- sible strategies in detail. Nevertheless, without aspiring to be exhaustive, four options will briefly be elaborated on. A first possible strategy involves swapping the dollar for the euro (or another currency) in international transactions. This ‘de-dollarization’ of the world econ- omy may allow traders to evade being subjected to US jurisdiction sim- ply on the basis of their use of the US financial system; an almost automatic consequence of denominating a contract in US dollars (Section A). A second strategy is to set up a ledger-based ‘special pur- pose vehicle’ to facilitate international business transactions without using the US financial system. At the time of writing, a version of such a vehicle was being developed to protect trade between the EU and Iran (Section B). A third option consists of establishing an EU sanctions body that mirrors OFAC, and which could take a united European stand against US secondary sanctions (Section C). Finally, the fourth and most aggressive option would be for the EU or states affected by US sec- ondary sanctions to retaliate against the US. Retaliation involves taking unfriendly measures, whether retorsions or countermeasures, against the US and US persons doing business in the EU with a view to forcing the US to reconsider the reach of its sanctions legislation (Section D).
A. Boosting the position of the euro One suggestion that is sometimes put forward as a possible way to coun- ter the weaponization of the dollar and the US financial system for US foreign policy purposes is to boost the position of the euro in the global economy, specifically as an international reserve currency, as an inter- national payment currency, and as an international investment currency. In recent years, there have been increasing calls from high-level officials within Europe for a stronger role for the euro.508 At times, these calls have been expressly linked to the US’s use of secondary sanctions in the financial domain and the resulting erosion of Europe’s economic and monetary sovereignty.509 The idea of gradually supplanting the dollar
507 See also Bonnecarre`re, ‘Extraterritorialite´ des sanctions ame´ricaines: Quelles re´ponses de l’Union europe´enne?’, 27: ‘l’action de l’Union europe´enne et de ses E´ tats membres doit aussi et sur- tout eˆtre politique’. 508 Consider, eg, the statements by several EU officials in the following European Commission Press Release: ‘Commission Presents Ways to Further Strengthen the Euro’s Global Role’ (5 December 2018)
510 See, eg, Geranmayeh and Lafont Rapnouil, ‘Meeting the Challenge of Secondary Sanctions’, 78–80. See also Bonnecarre`re, ‘Extraterritorialite´ des sanctions ame´ricaines: Quelles re´ponses de l’Union europe´enne?’, 25–26. 511 See, eg, M Lester, ‘Venezuela Converts Airport Taxes into Bitcoin to Evade US Sanctions’ (EU Sanctions, 30 July 2019)
B. Facilitating international transactions by means of a special purpose vehicle De-dollarization is a long-term project, and requires the confidence of traders in the stability of other currencies. A short-term alternative con- sists of the creation of a ‘special purpose vehicle’ (SPV) to facilitate fi- nancial transactions and maintain trade between third countries and US sanctions targets. On 31 January 2019, the UK, France, and Germany effectively revealed an ‘Instrument in Support of Trade Exchanges’ (INSTEX), an SPV which allows for the ‘bartering’ of goods between Iranian and European corporations without direct financial transactions
515 ibid, chart 2 and table 1. 516 Geranmayeh and Lafont Rapnouil, ‘Meeting the Challenge of Secondary Sanctions’, 79. See also F Guarascio and D Zhdannikov, ‘EU Brings Industry Together to Tackle Dollar Dominance in Energy Trade’ Reuters (13 February 2019)
521 UK Foreign and Commonwealth Office, ‘New Mechanism to Facilitate Trade with Iran: Joint Statement’ (31 January 2019)
527 Countering America’s Adversaries Through Sanctions Act, Pub L No 115-44 (2017) s 111(a)(3). It may thus not engender fierce US opposition: E Batmanghelidj and A Hellman, ‘How Europe Could Blunt U.S. Iran Sanctions Without Washington Lifting A Finger’ Foreign Policy (3 December 2018) C. A European Office of Foreign Assets Control A third option is to mirror OFAC at the EU level, at least to some ex- tent. This might enable Europe to form a united and more effective front against US secondary sanctions. Currently, OFAC is described by some as a genuine ‘war machine’.536 In contrast, the coordination of the entire panoply of EU restrictive measures, including the EU Blocking Statute, rests in the hands of no more than a dozen officials of the European External Action Service and the European Commission. In turn, the enforcement of these measures is a matter for the national group>. The six countries joining the initial three shareholders (France, Germany, and the UK) included Belgium, Denmark, Finland, the Netherlands, Norway, and Sweden. 533 European External Action Service, ‘JCPOA: Chair’s Statement following the meeting of the Joint Commission’ (26 February 2020) 537 See Mark Rutte, ‘The EU: From the Power of Principles towards Principles and Power’ (Churchill Lecture, Europa Institut, University of Zurich, 13 February 2019) D. Retaliatory measures Another suggestion that is sometimes put forward is for the EU to take retaliatory measures in response to US secondary sanctions. The under- lying idea is that ‘offence is the best defence’, and that Europe should therefore raise the costs for the US of enforcing secondary sanctions so as to make the US reconsider its current jurisdictional overreach. In the trade domain, the EU has both the competence (under the EU Treaties) and the leverage (as the world’s largest economy) to respond to unlawful trade restrictions with retaliatory measures. Thus, in May 2018, the EU decided to raise duties on the import of a broad range of products from the US in reaction to the Trump administration’s earlier tariff increase on imports of certain steel and aluminium products.544 It did so having identified imports into the EU vulnerable to tariff increases so as to maximize pressure on the US. The EU measures were notified to the WTO under article 12(5) of the WTO Agreement on Safeguards.545 The EU’s position was that the US’s tariff increase was unrelated to the GATT ‘security exception’ (as the US contended), but instead qualified as a ‘safeguard measure’; that is, an import restriction seeking to protect a domestic industry facing a threat of serious injury due to foreign com- petition.546 The Safeguards Agreement exceptionally permits such 543 Council Regulation (EU) 2017/1939 of 12 October 2017 implementing enhanced cooperation on the establishment of the European Public Prosecutor’s Office [2017] OJ L283/1 (the EPPO). For a discussion, see W Geelhoed, LH Erkelens, and AWH Meij (eds), Shifting Perspectives on the European Public Prosecutor’s Office (Springer 2017). There are currently 22 participating Member States. The Commission has not yet set the starting date for the EPPO’s operations, but the aim is for the EU prosecutor to assume his tasks by the end of 2020. 544 Commission Implementing Regulation (EU) 2018/724 of 16 May 2018 on certain commercial policy measures originating in the United States of America [2018] OJ L122/14. 545 WTO, ‘Immediate Notification under Articles 12.5 of the Agreement on Safeguards to the Council for Trade in Goods of Proposed Suspension of Concession and Other Obligations referred to in Paragraph 2 of Article 8 of the Agreement on Safeguards: European Union’ (Doc No G/L/ 12337, 18 May 2018). 546 More specifically, under art 2(1) of the Agreement on Safeguards Annex 1B to Marrakesh Agreement Establishing the World Trade Organization (adopted 15 April 1994, entered into force 1 January 1995) 1869 UNTS 154, a member may apply a safeguard measures to a product ‘only if that Member has determined, pursuant to the provisions set out below, that such product is being imported into its territory in such increased quantities, absolute or relative to domestic production, and under such conditions as to cause or threaten to cause serious injury to the domestic industry that produces like or directly competitive products’. See further A Raina, ‘What Is A Safeguard 108 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 measures under certain conditions (eg, notification). Specifically, when a safeguard measure adversely affects other Members exporting the product concerned, the latter must be granted adequate trade compensa- tion to remedy these effects (article 8(1)). When consultation over such compensation is fruitless, article 8(2) permits affected exporting mem- bers to suspend the application of ‘substantially equivalent concessions or other obligations under GATT 1994’ vis-a`-vis the WTO member applying the safeguard measure.547 Such unilateral suspension of con- cessions or other obligations—which is what the EU claimed to do— constitutes a rare exception to the principle that states cannot adopt trade sanctions in the context of a WTO dispute until the (quasi-)judi- cial dispute settlement procedure has run its course. Thus, the Safeguards Agreement exceptionally allows proportionate trade restric- tions without expecting WTO members to wait out the—sometimes lengthy—proceedings before the Dispute Settlement Body.548 This ex- ceptional route does not, however, seem to be available in the present context. Indeed, even though US secondary sanctions have undeniably adversely affected EU companies, it is less clear whether they have ad- versely affected EU exports to the US. What is more, the sanctions do not seek to protect US domestic industries but rather pursue US foreign policy objectives. Consequently, if the EU is serious about its attach- ment to the (international) rule of law549 and is keen on preserving the integrity of the WTO framework, unilateral trade sanctions, especially in the form of tariff increases, are in principle off the table. Apart from the foregoing factors, the risk of an escalating trade war and the fact that the EU has a substantial trade surplus in its trade with the US550 suggest that caution is required. That is not to say that any retaliatory action is automatically excluded. Third states remain free to have recourse to so-called ‘retorsions’.551 Such action could, for instance, take the form of measures in the Measure under WTO Law?’ (2019) Leuven Centre for Global Governance Studies Working Paper 208 552 The WTO Agreements have their own lex specialis regime for trade sanctions. 553 Commentary to ARSIWA, 135–36. 554 ibid 134 (art 51). 555 ibid 131–34. The Commentary suggests that this must be interpreted as referring to non- derogable human rights: ibid 132. A contrario, it would seem that countermeasures are not automat- ically excluded from restricting, for example, the right to property of natural or legal persons (a right which, in any case, is not absolute). 556 M Lester, ‘China to Implement an “Unreliable Entities List”’ (EU Sanctions, 4 June 2019) 557 One could also entitle EU companies to sue such companies in private law proceedings. An amendment of the clawback provision of the Blocking Statute to this effect may be called for to en- sure that EU Member States’ courts have jurisdiction over such claims. This amendment could take its cue from s 6 of the UK’s Protection of Trading Interests Act 1980 which, situated in its historic context, allowed UK corporations to sue, in UK courts, US companies which had earlier successful- ly enforced US antitrust law as private attorney-generals, and obtained punitive damages. Section 6 entitles ‘qualifying defendants’ to recover from the party in whose favour a judgment for multiple damages was given by ‘a court of an overseas country’. 558 See in particular s 220 of the Iran Threat Reduction and Syria Human Rights Act of 2012, Pub L No 112-158 (2012) (which envisages sanctions for persons that provide specialized financial messaging services to the Central Bank or other designated Iranian banks). SWIFT’s exposure to US sanctions primarily concerns the risk of being cut off from the US financial market and/or losing its US customers (financial institutions). Additional factors include the presence of US nationals on its board and among its staff, or the fact that it holds assets (specifically a data centre) within the US. 559 ‘EU says SWIFT decision on Iran banks regrettable’ Reuters (7 November 2018) VIII. CONCLUDING OBSERVATIONS The wide extraterritorial reach of US secondary sanctions legislation is a well-known phenomenon that has increasingly left its mark on inter- national trade, foreign investment, and global finance. It has long been a thorn in the side of the EU and its Member States, as well as various non-EU countries. In previous decades, US sanctions against commun- ist China (in the 1960s) and the Soviet Union (in the 1980s) already caused tension between the US and Europe. In 1982, for instance, the EC denounced the US’s ‘Soviet Pipeline Regulations’ as running coun- ter to the generally accepted bases of jurisdiction under international law.566 Tension resurfaced with renewed vigour in the mid-1990s with the adoption of ever more far-reaching sanctions instruments, in par- ticular the Helms-Burton Act and the Iran and Libya Sanctions Act. In the end, however, a political compromise was reached between the US and Europe, as the US agreed not to enforce secondary sanctions and to suspend some of its most controversial sanctions provisions. The agreement signalled a return to normality and, in 2008, one of the present authors observed how ‘[t]he last decade has been remarkably quiet on the secondary boycott front’.567 In hindsight, this period may rather have been the proverbial lull before the storm. The subsequent adoption of sweeping secondary sanctions, particularly targeting Iran, has indeed resulted in a deep rift between the US and the rest of the international community, including Europe. The situation remained under control as long as the EU had in place far-reaching import and ex- port restrictions of its own targeting Iran and its petroleum industry, as 563 Geranmayeh and Lafont Rapnouil, ‘Meeting the Challenge of Secondary Sanctions’, 76. 564 Threats to this end might also encourage the US to set up its own alternative to SWIFT in the longer run. 565 This is indeed the proposal of Geranmayeh and Rapouil: see Geranmayeh and Lafont Rapnouil, ‘Meeting the Challenge of Secondary Sanctions’, 75. 566 ‘European Communities: Comments on the US Regulations Concerning Trade with the USSR’, 891. 567 C Ryngaert, ‘Extraterritorial Export Controls (Secondary Boycotts)’, 627. 112 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 well as in the subsequent period (2015–18) when the US and the EU both agreed to suspend their respective sanctions against Iran in accord- ance with the JCPOA (the so-called ‘Iran nuclear deal’). Yet the Trump administration’s decision to unilaterally pull out of the nuclear deal and reactivate the full panoply of its sanctions arsenal has again put it at log- gerheads with the EU; all the more since the Trump administration has consistently refused pleas to exclude European companies from the scope of the US sanctions regime. The reality today is that European companies are increasingly caught in the cross-fire of US sanctions, as is illustrated by the many settle- ments with the notorious US OFAC, in which European banks have agreed to pay enormous amounts, as well as by the fact that many European companies have unwound transactions with, or investments in, Iran, including several billion-dollar deals. Even if the exact econom- ic cost to European companies remains unknown, it is clear that the US has successfully weaponized access to its market and currency to pursue its foreign policy agenda. By forcing foreign companies to either trade with the US or with the state subject to primary US sanctions, the US has succeeded in imposing its foreign policy agenda on non-nationals at the expense of the economic sovereignty of third states. The assertive use of secondary sanctions has also eroded the political sovereignty of third states, and of the EU. Back in 2015, the adoption of the JCPOA, in which the US and Europe agreed to sanctions relief in re- turn for Iranian concessions in respect of its nuclear programme, was hailed as a major tour de force and a rare success for European diplo- macy. Yet the US withdrawal from the (political) agreement and the re- activation of harsh secondary sanctions have fundamentally crippled Europe’s leverage to use the promise of investment and trade with Iran as a ‘carrot’ to keep Iran’s nuclear programme in check. As a result, at the time of writing, the future of the JCPOA hangs in the balance, in spite of European attempts to save it from oblivion.568 The resort to secondary sanctions will not disappear in the near fu- ture. The 2020 US presidential elections are unlikely to make a differ- ence, as the use of secondary sanctions appears to enjoy widespread bipartisan support in the US Congress. Furthermore, while US second- ary sanctions have hitherto been focused on smaller countries of limited importance in global trade and finance, the next target could well be a country with which Europe has much closer trade relations, such as China or Russia. This may potentially result in far greater economic damage for the EU. The signing into law of a US act seeking to 568 Possibly because the JCPOA could not be salvaged without US cooperation, on 18 July 2019, Iran ‘offered a deal with the US in which it would formally and permanently accept enhanced inspections of its nuclear programme, in return for the permanent lifting of US sanctions’: see J Borger, ‘Iran Makes “Substantial” Nuclear Offer In Return For US Lifting Sanctions’ The Guardian (18 July 2019) 569 See above. Some European energy companies already appear to be considering suspending projects in the Russian Federation because of other US sanctions (unrelated to the Nord Stream 2 project): see, eg, M Kiselyova, ‘Rosneft and Eni Discuss Freezing Barents Sea Projects – Ifax’ Reuters (24 October 2018) 571 The collective nature is most evident in advisory proceedings before the ICJ at the initiative of the UNGA. WTO proceedings could in turn be initiated by the EU, with other WTO members either joining the consultations and the request to establish a panel, or instead acting as third-party interveners in the proceedings. SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? 115 Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 terms of legal clarity, comes with a nigh on impossible evidentiary bur- den, and is unevenly implemented in EU Member States (who have lit- tle interest in enforcing it). Still, in contractual disputes, some Member State courts have proved willing to give effect to the Blocking Statute, and have ordered parties to comply with contractual obligations, even if compliance might expose them to US sanctions.572 If the Blocking Statute has proved to be mostly a paper tiger—a mere symbol of the EU’s disagreement with the wide reach of US sanctions— this begs the question of what other options remain for the EU. The EU’s efforts to create an SPV to allow for the bartering of goods, there- by facilitating trade with Iran without getting caught in the net of US sanctions, have hitherto hardly been impressive. Setting up the INSTEX mechanism has proved cumbersome, and its scope remains modest, as it is limited to goods that are not covered by US sanctions in the first place. More importantly, INSTEX and its customers could be directly subjected to US sanctions with a single stroke of the pen. That leaves the spectre of EU retorsions or countermeasures to raise the cost to the US of imposing secondary sanctions. One possible course of ac- tion would be for the EU to impose financial sanctions on natural or legal persons benefitting from US secondary sanctions, in particular those seeking to obtain damages from EU companies on the basis of the contested Title III of the Helms-Burton Act. All in all, however, con- fronting sanctions with more sanctions is not a particularly alluring pro- spect for an organization supposedly committed to ‘effective multilateralism’ and the rule of law. The establishment of an EU-style OFAC has also been mooted as a possible counterweight to the US OFAC, but it is not obvious that EU Member States would transfer a part of their sanctions powers to the EU. In addition, EU Member States may wish to reconsider their position within the IMF, specifically with regard to the IMF’s tacit approval procedure for payment restric- tions based on security grounds. Even if there is no easy, one-size-fits-all solution at hand, some steps are nonetheless conceivable. For one thing, reliance on INSTEX or similar bartering mechanisms may expand in the future573 as states and economic operators adapt to US secondary sanctions574 and look for al- ternative mechanisms to continue trade with sanctions targets.575 More 572 PAM International NV v Exact Software Nederland BV; Italian judgment reported in M Lester, ‘Italian Judgments on the EU Blocking Regulation’. 573 PE Harrell, ‘Trump’s Use of Sanctions Is Nothing Like Obama’s’ Foreign Policy (5 October 2019) (‘[INSTEX and similar] efforts do have the potential to scale up over the long-term, however, if countries make large-scale investments in them’). 574 See T Biersteker and PAG van Bergeijk, ‘How and When Do Sanctions Work? The Evidence’ in I Dreyer and J Luengo-Cabrera (eds), On Target? EU Sanctions as Security Policy Tools (EU Institute for Security Studies 2015) 17, 21. On adaptation to economic sanctions, see also M Smeets, ‘Can Economic Sanctions Be Effective?’ (Staff Working Paper ERSD-2018-03, WTO Economic Research and Statistics Division, 15 March 2018). 575 JJ Lew and R Nephew, ‘The Use and Misuse of Economic Statecraft: How Washington is Abusing its Financial Might’ Foreign Affairs (November/December 2018) 139, 148–49. 116 SECONDARY SANCTIONS: A WEAPON OUT OF CONTROL? Downloaded from https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823 by Ghent University user on 22 September 2020 fundamentally, US aggression may encourage states to avoid economic contact with the US altogether, and the attendant exposure to US sanc- tions, thereby undermining the latter’s effectiveness.576 There is some evidence that such avoidance moves have already proved effective.577 At some point, it is possible that the US may realize that its aggressive use of secondary sanctions may harm, rather than further, US interests, par- ticularly if economic operators pivot away from the US financial system or third states retaliate.578 Ultimately, perhaps what is needed most is an international dialogue on the role of, and limits to, unilateral sanctions, so as to prevent further escalation to the detriment of the international legal order. 576 US Government Accountability Office, ‘Economic Sanctions: Agencies Assess Impacts on Targets, and Studies Suggest Several Factors Contribute to Sanctions’ Effectiveness’ (Report GAO-20-145, October 2019) 24. 577 Sultoon and Walker, ‘Secondary Sanctions’ Implications and the Transatlantic Relationship’, 7. 578 See also JJ Forrer, ‘Secondary Economic Sanctions: Effective Policy or Risky Business?’, 9; Sultoon and Walker, ‘Secondary Sanctions’ Implications and the Transatlantic Relationship’, 11.